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Overconfidence and bubbles in experimental asset markets

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  • Michailova, Julija
  • Schmidt, Ulrich

Abstract

This paper investigates the relationship between market overconfidence and occurrence of stock-price bubbles. Sixty participants traded stocks in ten experimental asset markets. Markets were constructed on the basis of subjects’ overconfidence: The most overconfident subjects form high overconfidence markets, and the least overconfident subjects low overconfidence markets. Prices in low overconfidence markets tend to track the fundamental asset value more accurately than prices in high overconfidence markets and are significantly lower and less volatile. Additionally we observe significantly higher bubble measures and trading volume in high overconfidence markets. Two possible explanations for these differences are analyzed: While price expectations are significantly higher in high overconfidence markets no differences in the average degree of risk aversion were detected.

Suggested Citation

  • Michailova, Julija & Schmidt, Ulrich, 2011. "Overconfidence and bubbles in experimental asset markets," MPRA Paper 63823, University Library of Munich, Germany, revised Oct 2014.
  • Handle: RePEc:pra:mprapa:63823
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Brice Corgnet & Mark DeSantis & David Porter, 2015. "What Makes a Good Trader? On the Role of Quant Skills, Behavioral Biases and Intuition on Trader Performance," Working Papers 15-17, Chapman University, Economic Science Institute.
    2. Michailova, Julija, 2010. "Development of the overconfidence measurement instrument for the economic experiment," MPRA Paper 26384, University Library of Munich, Germany.
    3. Giovanni Ferri & Matteo Ploner & Matteo Rizzolli, 2016. "Trading Fast and Slow: The Role Of Deliberation In Experimental Financial Markets," CERBE Working Papers wpC07, CERBE Center for Relationship Banking and Economics.
    4. Nobuyuki Hanaki & Eizo Akiyama & Ryuichiro Ishikawa, 2017. "Behavioral Uncertainty and the Dynamics of Traders' Confidence in their Price Forecasts," GREDEG Working Papers 2017-18, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    5. repec:spt:apfiba:v:8:y:2018:i:3:f:8_3_5 is not listed on IDEAS
    6. Kocher, Martin G. & Lucks, Konstantin E. & Schindler, David, 2016. "Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets," Discussion Papers in Economics 27572, University of Munich, Department of Economics.
    7. Dickinson, David L. & Chaudhuri, Ananish & Greenaway-McGrevy, Ryan, 2017. "Trading While Sleepy? Circadian Mismatch and Excess Volatility in a Global Experimental Asset Market," IZA Discussion Papers 10984, Institute for the Study of Labor (IZA).
    8. Nobuyuki Hanaki & Eizo Akiyama & Ryuichiro Ishikawa, 2018. "Behavioral uncertainty and the dynamics of traders' confidence in their price forecasts ," Post-Print hal-01712301, HAL.
    9. Peiran Jiao & Amos Nadler, 2016. "The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading," Economics Series Working Papers 806, University of Oxford, Department of Economics.
    10. Farjam, Mike & Kirchkamp, Oliver, 2018. "Bubbles in hybrid markets: How expectations about algorithmic trading affect human trading," Journal of Economic Behavior & Organization, Elsevier, vol. 146(C), pages 248-269.
    11. repec:wsi:acsxxx:v:20:y:2017:i:02n03:n:s0219525917500059 is not listed on IDEAS
    12. Nobuyuki Hanaki & Eizo Akiyama & Ryuichiro Ishikawa, 2017. "Behavioral Uncertainty and the dynamics of traders' confidence in their Price forecasts," Working Papers halshs-01622466, HAL.
    13. Langnickel, Ferdinand & Zeisberger, Stefan, 2016. "Do we measure overconfidence? A closer look at the interval production task," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 121-133.
    14. Stefan Palan, 2013. "A Review of Research into Smith, Suchanek and Williams Markets," Working Paper Series, Social and Economic Sciences 2013-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

    More about this item

    Keywords

    Overconfidence; miscalibration; overprecision; overestimation; price bubbles; experimental asset market; risk aversion.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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