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Thar she bursts - Reducing confusion reduces bubbles

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  • Michael Kirchler
  • Jürgen Huber
  • Thomas Stöckl

Abstract

To explore why bubbles frequently emerge in the experimental asset market model of Smith, Suchanek and Williams (1988), we vary the fundamental value process (constant or declining) and the cash-to-asset value-ratio (constant or increasing). We observe high mispricing in treatments with a declining fundamental value, while overvaluation emerges when coupled with an increasing C/A-ratio. A questionnaire reveals that the declining fundamental value process confuses subjects, as they expect the fundamental value to stay constant.Running the experiment with a different context ("stocks of a depletable gold mine" instead of "stocks") significantly reduces mispricing and overvaluation as it reduces confusion.

Suggested Citation

  • Michael Kirchler & Jürgen Huber & Thomas Stöckl, 2011. "Thar she bursts - Reducing confusion reduces bubbles," Working Papers 2011-08, Faculty of Economics and Statistics, University of Innsbruck.
  • Handle: RePEc:inn:wpaper:2011-08
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    References listed on IDEAS

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    More about this item

    Keywords

    Experimental economics; asset market; bubble; market efficiency; confusion;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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