Effect of Uncertainty About Others' Rationality in Experimental Asset Markets: An Experimental Analysis

25 Pages Posted: 21 Nov 2012

See all articles by Eizo Akiyama

Eizo Akiyama

University of Tsukuba - Department of Social Systems and Management

Nobuyuki Hanaki

Osaka University - Institute of Social and Economic Research

Ryuichiro Ishikawa

Waseda University-SILS

Date Written: November 19, 2012

Abstract

We investigate the extent to which price deviations from fundamental values in an experimental asset market are due to the uncertainty of subjects regarding others' rationality. We do so by comparing the price forecasts submitted by subjects in two market environments: all six traders are human subjects (6H), and one human subject interacts with five profit-maximizing computer traders who assume all the traders are also maximizing profit (1H5C). The subjects are told explicitly about the behavioral assumption of the computer traders (in both 6H and 1H5C) as well as which environment they are in. Results from our experiments show that there is no significant difference between the distributions of the initial deviations of the forecast prices from the fundamental values in the two markets. However, as subjects learn by observing the realized prices, the magnitude of deviations becomes significantly smaller in 1H5C than in 6H markets. We also conduct additional experiments where subjects who have experienced the 1H5C market interact with five inexperienced subjects. The price forecasts initially submitted by the experienced subjects follow the fundamental value despite the fact that the subjects are explicitly told that the five other traders in the market are inexperienced subjects. These findings do not support the hypothesis that uncertainty about others' rationality plays a major role in causing substantial deviation of forecast prices from the fundamental values in these asset market experiments.

Keywords: rationality, common knowledge, experiment, asset markets, computer traders

JEL Classification: C90, D84

Suggested Citation

Akiyama, Eizo and Hanaki, Nobuyuki and Ishikawa, Ryuichiro, Effect of Uncertainty About Others' Rationality in Experimental Asset Markets: An Experimental Analysis (November 19, 2012). Available at SSRN: https://ssrn.com/abstract=2178291 or http://dx.doi.org/10.2139/ssrn.2178291

Eizo Akiyama

University of Tsukuba - Department of Social Systems and Management ( email )

Japan

Nobuyuki Hanaki (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

6-1, Mihogaoka
Suita, Osaka 567-0047
Japan

Ryuichiro Ishikawa

Waseda University-SILS ( email )

Shinjuku, Tokyo 1658050
Japan

HOME PAGE: http://www.f.waseda.jp/r.ishikawa/

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