Positive Expectations Feedback Experiments and Number Guessing Games as Models of Financial Markets

Tinbergen Institute Discussion Paper No. 08-076/1

42 Pages Posted: 3 Sep 2008 Last revised: 7 Aug 2010

See all articles by Joep Sonnemans

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE); Tinbergen Institute

Date Written: August 22, 2008

Abstract

In repeated number guessing games choices typically converge quickly to the Nash equilibrium. In positive expectations feedback experiments, however, convergence to the equilibrium price tends to be very slow, if it occurs at all. Both types of experimental designs have been suggested as modeling essential aspects of financial markets. In order to isolate the source of the differences in outcomes we present several new treatments in this paper. We conclude that the feedback strength (i.e. the ‘p-value’ in standard number guessing games) is essential for the results. Furthermore, positive expectations feedback experiments may provide good representations of highly speculative markets while standard number guessing games model financial markets with more emphasis on dividend yield and value stocks.

Keywords: number guessing game, beauty contest game, expectations feedback systems

JEL Classification: C91, G12

Suggested Citation

Sonnemans, Joep and Tuinstra, Jan, Positive Expectations Feedback Experiments and Number Guessing Games as Models of Financial Markets (August 22, 2008). Tinbergen Institute Discussion Paper No. 08-076/1, Available at SSRN: https://ssrn.com/abstract=1260845 or http://dx.doi.org/10.2139/ssrn.1260845

Joep Sonnemans (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

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Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

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Tinbergen Institute ( email )

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