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American Economic Review: Vol. 98 No. 3 (June 2008)
AER Volume. 98, Issue 3 | 
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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
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)
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
C91: Design of Experiments: Laboratory, Individual
