Individual Speculative Behavior and Overpricing in Experimental Asset Markets

21 Pages Posted: 15 Mar 2015 Last revised: 12 Mar 2018

See all articles by Dirk-Jan Janssen

Dirk-Jan Janssen

Radboud University Nijmegen - Department of Economics

Sascha Füllbrunn

Radboud University Nijmegen - Institute for Management Research

Utz Weitzel

Utrecht University - Utrecht University School of Economics; Radboud University - Economics Department, IMR

Date Written: March 9, 2018

Abstract

A rich history of theoretical models in finance shows that speculation can lead to overpricing and price bubbles. We provide evidence that, indeed, individual speculative behavior fuels overpricing in (experimental) asset markets. In a first step, we elicit individual speculative behavior in a one-shot setting with a novel Speculation Elicitation Task (SET). In a second step, we use this measure of speculative behavior to compose dynamic, continuous double auction markets in line with Smith, Suchanek, and Williams (1988). We find significant higher overpricing in markets with traders who exhibited more speculative behavior in the individual SET. However, we find no such differences in overpricing when we test for alternative explanations, using a market environment introduced by Lei, Noussair, and Plott (2001) where speculation is impossible. Taken together, our results corroborate the notion that speculation is an important factor in overpricing and bubble formation if market environments allow for the pursuit of capital gains.

Keywords: Speculation, Experimental Asset Markets, Finance, Bubble

JEL Classification: C90, D40, D84, G10

Suggested Citation

Janssen, Dirk-Jan and Füllbrunn, Sascha and Weitzel, Utz, Individual Speculative Behavior and Overpricing in Experimental Asset Markets (March 9, 2018). Experimental Economics, Forthcoming, DOI: 10.1007/s10683-018-9565-4. Available at SSRN: https://ssrn.com/abstract=2577867 or http://dx.doi.org/10.2139/ssrn.2577867

Dirk-Jan Janssen (Contact Author)

Radboud University Nijmegen - Department of Economics ( email )

Nijmegen, 6500 HK
Netherlands

Sascha Füllbrunn

Radboud University Nijmegen - Institute for Management Research ( email )

PO Box 9108
Nijmegen, 6500 HK
Netherlands

HOME PAGE: http://www.ru.nl/english/people/fullbrunn-s/

Utz Weitzel

Utrecht University - Utrecht University School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Radboud University - Economics Department, IMR ( email )

Nijmegen, 6500 HK
Netherlands

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