The Origins of Bubbles in Laboratory Asset Markets

FRB of Atlanta Working Paper No. 2006-6

45 Pages Posted: 19 May 2006  

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business; Federal Reserve Bank of Atlanta

Narat Charupat

McMaster University - DeGroote School of Business

Richard Deaves

McMaster University - Michael G. DeGroote School of Business; Center for European Economic Research (ZEW)

Brian Kluger

University of Cincinnati

Date Written: May 2006

Abstract

In twelve sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. When these tests indicate the presence of probability judgment error and speculation, bubbles are more likely to occur. This finding suggests that both factors are important bubble drivers.

Keywords: bubbles, asset markets, judgment error

JEL Classification: C91, C92, G10

Suggested Citation

Ackert, Lucy F. and Charupat, Narat and Deaves, Richard and Kluger, Brian, The Origins of Bubbles in Laboratory Asset Markets (May 2006). FRB of Atlanta Working Paper No. 2006-6. Available at SSRN: https://ssrn.com/abstract=903159 or http://dx.doi.org/10.2139/ssrn.903159

Lucy F. Ackert (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Narat Charupat

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 ext. 23987 (Phone)

Richard Deaves

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-522-3976 (Phone)

Center for European Economic Research (ZEW)

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

Brian D. Kluger

University of Cincinnati ( email )

Cincinnati, OH 45221-0389
United States
513-556-1688 (Phone)

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