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Experience Does not Eliminate Bubbles: Experimental Evidence

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  • Anita Kopanyi-Peuker
  • Matthias Weber

Abstract

We study the role of experience in the formation of asset price bubbles. Therefore, we conduct two related experiments. One is a call market experiment in which participants trade assets with each other. The other is a learning-to-forecast experiment in which participants only forecast future prices, while the trade, which is based on these forecasts, is computerized. Each experiment comprises three treatments that vary the amount of information about the fundamental value that participants receive. Each market is repeated three times. In both experiments and in all treatments, we observe sizable bubbles. These bubbles do not disappear with experience. Our findings in the call market experiment stand in contrast to the literature. Our findings in the learningto-forecast experiment are novel. Interestingly, the shape of the bubbles is different between the two experiments. We observe flat bubbles in the call market experiment and boom-and-bust cycles in the learning-to-forecast experiment.

Suggested Citation

  • Anita Kopanyi-Peuker & Matthias Weber, 2018. "Experience Does not Eliminate Bubbles: Experimental Evidence," Working Papers on Finance 1822, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2018:22
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    Cited by:

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    2. Matthias Weber & John Duffy & Arthur Schram, 2019. "Credit Default Swap Regulation in Experimental Bond Markets," Working Papers on Finance 1905, University of St. Gallen, School of Finance.
    3. Cars Hommes & Anita Kopányi-Peuker & Joep Sonnemans, 2021. "Bubbles, crashes and information contagion in large-group asset market experiments," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 414-433, June.
    4. Muhammed Bulutay & Camille Cornand & Adam Zylbersztejn, 2020. "Learning to deal with repeated shocks under strategic complementarity: An experiment," Working Papers halshs-02458140, HAL.
    5. Kopányi, Dávid & Rabanal, Jean Paul & Rud, Olga A. & Tuinstra, Jan, 2019. "Can competition between forecasters stabilize asset prices in learning to forecast experiments?," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).
    6. Weber, Matthias, 2019. "Behavioral Optimal Taxation: The Case of Aspirations," SocArXiv fpnw6, Center for Open Science.

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    More about this item

    Keywords

    Experimental finance; asset market experiment; asset pricing; behavioral finance; bubbles; experience;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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