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The Institutional Nature of Price BubblesSheen S. LevineColumbia University Edward J. ZajacNorthwestern University - Kellogg School of Business June 20, 2007 Abstract: Price bubbles remain a puzzle for economic theory, particularly given their appearance in experimental markets with high efficiency and minimized uncertainty and noise. We propose that bubbles are caused by the institutionalization of social norms, when individuals observe and adopt the behavior of others. Explanations of bounded rationality or individual bias appear insufficient as we show experimentally that (1) participants' pricing skills are better ex-ante than ex-post and (2) that individual discrepancies between intrinsic values and market prices become increasingly serially correlated during trading. We also find no support for the Greater Fool explanation.
Number of Pages in PDF File: 24 Keywords: Bubble, Market, Finance, Institution, Behavioral Economics, Economic Sociology JEL Classification: B52, C91, D41, D53, D83, G12 working papers seriesDate posted: February 1, 2007 ; Last revised: January 28, 2008Suggested Citation |
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