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The Institutional Nature of Price Bubbles

Sheen S. Levine

Columbia University

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

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Date posted: February 1, 2007 ; Last revised: January 28, 2008

Suggested Citation

Levine, Sheen S. and Zajac, Edward J., The Institutional Nature of Price Bubbles (June 20, 2007). Available at SSRN: http://ssrn.com/abstract=960178 or http://dx.doi.org/10.2139/ssrn.960178

Contact Information

Sheen S. Levine (Contact Author)
Columbia University ( email )
3022 Broadway
New York, NY 10027
United States
Edward J. Zajac
Northwestern University - Kellogg School of Business ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
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