Does the Market Have a Mind of Its Own, and Does it Get Carried Away with Excess Cash?
University of Pittsburgh - Department of Mathematics
Journal of Psychology and Financial Markets , Vol. 3, pp. 72-75, March 2002
A set of experiments tests the hypothesis that a market discovers price even though no individual trader has all of the necessary information. Participants trade an asset that can have a single payout of $1, $2 or $3. In each experiment there are three groups: one receives information, for example that the payout is not $3, another that it is not $2, and the third receives no additional information. With participants chosen from economics graduate students, prices evolve toward the payout price under neutral cash conditions. However, when there is a large or small amount of cash compared with asset value in the system, the price converges to the wrong price that is favored by the cash/asset ratio.
Number of Pages in PDF File: 8Accepted Paper Series
Date posted: January 20, 2005
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