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American Economic Review: Vol. 98 No. 3 (June 2008)

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Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?

Article Citation

Hussam, Reshmaan N., David Porter, and Vernon L. Smith. 2008. "Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?" American Economic Review, 98(3): 924-37.

DOI: 10.1257/aer.98.3.924

Abstract

We report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and "error" elimination among participants in a laboratory asset market and its effect on price bubbles. Our answer to the title question is: "yes." We impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium, and this treatment rekindles a bubble. However, in replications of that same challenging environment across three experience levels, we discover that the environment yields a rare residual tendency to bubble even in the third experience session. Therefore, a caveat must be placed on the effect of twice-experienced subjects in asset markets: in order for price bubbles to be extinguished, the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters. Experience, including possible "error" elimination, is not robust to major new environment changes in determining the characteristics of a price bubble.

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Authors

Hussam, Reshmaan N. (MIT)
Porter, David (Economic Science Institute, Chapman U)
Smith, Vernon L. (Economic Science Institute, Chapman U)

JEL Classifications

D83: Search; Learning; Information and Knowledge; Communication; Belief
C91: Design of Experiments: Laboratory, Individual


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