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Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets


Shin'ichi Hirota


Waseda University - Graduate School of Commerce

Shyam Sunder


Yale University - School of Management

November 2006

Yale ICF Working Paper No. 02-42; EFA 2003 Annual Conference Paper No. 119

Abstract:     
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.

Number of Pages in PDF File: 55

Keywords: stock price bubbles, short-term investors, backward induction, market experiments

JEL Classification: G12, C91

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Date posted: November 25, 2002  

Suggested Citation

Hirota, Shin'ichi and Sunder, Shyam, Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets (November 2006). Yale ICF Working Paper No. 02-42; EFA 2003 Annual Conference Paper No. 119. Available at SSRN: http://ssrn.com/abstract=302393 or http://dx.doi.org/10.2139/ssrn.302393

Contact Information

Shin'ichi Hirota (Contact Author)
Waseda University - Graduate School of Commerce ( email )
1-6-1, Nishi-Waseda
Shinjuku-ku, Tokyo 169-8050
Japan
+81-3-5286-2088 (Phone)
+81-3203-7067 (Fax)
Shyam Sunder
Yale University - School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)
203-432-6974 (Fax)
HOME PAGE: http://www.som.yale.edu/faculty/sunder/
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