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The Institutional Nature of Price Bubbles

24 Pages Posted: 1 Feb 2007 Last revised: 28 Jan 2008

Date Written: June 20, 2007

Abstract

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.

Keywords: Bubble, Market, Finance, Institution, Behavioral Economics, Economic Sociology

JEL Classification: B52, C91, D41, D53, D83, G12

Suggested Citation

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

Sheen S. Levine (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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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