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Journal of Economic Perspectives: Vol. 12 No. 1 (Winter 1998)

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Classroom Games: Speculation and Bubbles in an Asset Market

Article Citation

Ball, Sheryl B., and Charles A. Holt. 1998. "Classroom Games: Speculation and Bubbles in an Asset Market." Journal of Economic Perspectives, 12(1): 207-218.

DOI: 10.1257/jep.12.1.207

Abstract

This paper describes a classroom exercise in which students trade assets of uncertain value in a sequence of market periods. Assets pay one-dollar dividends at the end of each period, but once the dividend is paid there is fixed probability that the asset will be destroyed. Dividends and probabilities are chosen so that the fundamental value is constant over time. Speculative bubbles can be caused by divergent expectations about other traders' valuations of the asset. This exercise provides an interactive framework that facilitates discussions of discounting, rational expectations, and backward induction.

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Authors

Ball, Sheryl B. (VA Polytechnic Institute & State U)
Holt, Charles A. (U VA)

JEL Classifications

A22: Economic Education and Teaching of Economics: Undergraduate
G12: Asset Pricing; Trading volume; Bond Interest Rates

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