Working Paper
The origins of bubbles in laboratory asset markets
Abstract: In twelve sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. When these tests indicate the presence of probability judgment error and speculation, bubbles are more likely to occur. This finding suggests that both factors are important bubble drivers.
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Bibliographic Information
Provider: Federal Reserve Bank of Atlanta
Part of Series: FRB Atlanta Working Paper
Publication Date: 2006
Number: 2006-06