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Confidence and decision-making in experimental asset markets

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  • Aragón, Nicolás
  • Roulund, Rasmus Pank

Abstract

This paper examines how traders’ confidence and market confidence affect outcomes in an experimental asset market with known fundamental values. In this type of market, prices usually present large deviations from the fundamental value; in other words, bubbles are known to occur. We measure beliefs by asking participants to forecast the one-period-ahead price as a discrete probability mass distribution. We define confidence as the inverse of the dispersion of beliefs for each trader, and also create a market-wide measure of this to measure agreement across traders. We find that confidence affects price-formation and is also important in explaining the dynamics and size of the bubble. Moreover, as traders are successful they become increasingly certain of their beliefs, even if these beliefs are on non-fundamental values, thus increasing the likelihood of price bubbles.

Suggested Citation

  • Aragón, Nicolás & Roulund, Rasmus Pank, 2020. "Confidence and decision-making in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 178(C), pages 688-718.
  • Handle: RePEc:eee:jeborg:v:178:y:2020:i:c:p:688-718
    DOI: 10.1016/j.jebo.2020.07.032
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    More about this item

    Keywords

    Confidence; Expectations; Bubbles; Experimental asset markets; Overconfidence;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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