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Bubbles and Experience: An Experiment on Speculation

We investigate experimentally how the share of experienced traders in doubleauction asset markets affects trading, in particular the occurrence of bubble-crash pricing patterns. In each session, six subjects trade in three successive market rounds and gain experience. In a fourth round, depending on the treatment, two or four experienced subjects are replaced by inexperienced subjects. The results are compared to earlier findings when all traders were either inexperienced or experienced. We explore what can be learned by analogy between these laboratory findings and the performance of naturally occurring markets.

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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2003:1.

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Length: 25 pages
Date of creation: 20 Jan 2003
Date of revision:
Handle: RePEc:hhs:sunrpe:2003_0001
Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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  1. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  2. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 111.
  3. Dilip Abreu & Markus K. Brunnermeier, 2002. "Bubbles and crashes," LSE Research Online Documents on Economics 24905, London School of Economics and Political Science, LSE Library.
  4. Lei, V. & Noussair, C. & Plott, C.R., 1998. "Non-Speculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality," Purdue University Economics Working Papers 1120, Purdue University, Department of Economics.
  5. De Long, J Bradford, et al, 1989. " The Size and Incidence of the Losses from Noise Trading," Journal of Finance, American Finance Association, vol. 44(3), pages 681-96, July.
  6. Garber, Peter M, 1989. "Tulipmania," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 535-60, June.
  7. Robert Slonim, 2005. "Competing Against Experienced and Inexperienced Players," Experimental Economics, Springer, vol. 8(1), pages 55-75, April.
  8. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
  9. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September.
  10. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "The Size and Incidence of Losses from Noise Trading," J. Bradford De Long's Working Papers _128, University of California at Berkeley, Economics Department.
  11. Peterson, Steven P., 1993. "Forecasting dynamics and convergence to market fundamentals : Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 22(3), pages 269-284, December.
  12. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 68(4), pages 509-41, October.
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