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American Economic Review: Vol. 102 No. 2 (April 2012)

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Thar She Bursts: Reducing Confusion Reduces Bubbles

Article Citation

Kirchler, Michael, Jürgen Huber, and Thomas Stöckl. 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles." American Economic Review, 102(2): 865-83.

DOI: 10.1257/aer.102.2.865

Abstract

To explore why bubbles frequently emerge in the experimental asset market model of Smith, Suchanek, and Williams (1988), we vary the fundamental value process (constant or declining) and the cash-to-asset value ratio (constant or increasing). We observe high mispricing in treatments with a declining fundamental value, while overvaluation emerges when coupled with an increasing C/A ratio. A questionnaire reveals that the declining fundamental value process confuses subjects, as they expect the fundamental value to stay constant. Running the experiment with a different context ("stocks of a depletable gold mine" instead of "stocks") significantly reduces mispricing and overvaluation as it reduces confusion. (JEL C91, D14, G11, G12)

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Authors

Kirchler, Michael (U Innsbruck and Centre for Finance, U Gothenburg)
Huber, Jürgen (U Innsbruck)
Stöckl, Thomas (U Innsbruck)

JEL Classifications

C91: Design of Experiments: Laboratory, Individual
D14: Personal Finance
G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates


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