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Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets

  • Shin'ichi Hirota
  • Shyam Sunder

We experimentally explore how investor decision horizons influence the formation of stock prices. We find that in long-horizon sessions, where investors collect dividends till maturity, prices converge to the fundamental levels derived from dividends through backward induction. In short-horizon sessions, where investors exit the market by receiving the price (not dividends), prices levels and paths become indeterminate and lose dividend anchors; investors tend to form their expectations of future prices by forward, not backward, induction. These laboratory results suggest that investors' short horizons and the consequent difficulty of backward induction are important contributors to the emergence of price bubbles.

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File URL: http://icfpub.som.yale.edu/publications/2616
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2616.

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Date of creation: 01 Nov 2002
Date of revision: 01 Feb 2007
Handle: RePEc:ysm:somwrk:amz2616
Contact details of provider: Web page: http://icf.som.yale.edu/

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