American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Thar She Bursts: Reducing Confusion Reduces Bubbles
American Economic Review
vol. 102,
no. 2, April 2012
(pp. 865–83)
Abstract
To explore why bubbles frequently emerge in the experimental asset market model of Smith, Suchanek, and Williams (1988), we vary the fundamental value process (constant or declining) and the cash-to-asset value ratio (constant or increasing). We observe high mispricing in treatments with a declining fundamental value, while overvaluation emerges when coupled with an increasing C/A ratio. A questionnaire reveals that the declining fundamental value process confuses subjects, as they expect the fundamental value to stay constant. Running the experiment with a different context ("stocks of a depletable gold mine" instead of "stocks") significantly reduces mispricing and overvaluation as it reduces confusion. (JEL C91, D14, G11, G12)Citation
Kirchler, Michael, Jürgen Huber, and Thomas Stöckl. 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles." American Economic Review, 102 (2): 865–83. DOI: 10.1257/aer.102.2.865Additional Materials
JEL Classification
- C91 Design of Experiments: Laboratory, Individual
- D14 Personal Finance
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading volume; Bond Interest Rates