The Institutional Nature of Price Bubbles
Sheen S. Levine
Edward J. Zajac
Northwestern University - Kellogg School of Business
June 20, 2007
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
Date posted: February 1, 2007 ; Last revised: January 28, 2008
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