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Kirchler, Michael,
Jürgen Huber, and
Thomas Stöckl. 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles."
,
102(2): 865-83.
Show Article Details
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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Online Appendix
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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