Sunspots in the Laboratory

Abstract

We show that extrinsic or non-fundamental uncertainty influences markets in a controlled environment. This work provides the first direct evidence of sunspot equilibria. These equilibria require a common understanding of the semantics of the sunspot variable, and they appear to be sensitive to the flow of information. Extrinsic uncertainty matters when information flows slowly, as in a call market, but it need not matter when information flows quickly, as in a double auction where infra-marginal bids and offers are observable.

Keywords: Sunspots, Asset Markets, Self-fulfilling Prophecies, Extrinsic Uncertainty, Correlated Equilibrium, Experimental Economics

JEL Classification: D5, C9