Effect of uncertainty about others’ rationality in experimental asset markets

Eizo Akiyama (), Nobuyuki Hanaki and Ryuchiro Ishikawa ()
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Ryuchiro Ishikawa: Faculty of Engineering, Information and Systems. University of Tsukuba

No 1234, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: We investigate the extent to which price deviations from fundamental values in an experimental asset market are due to the uncertainty of subjects regarding others’ rationality. We do so by comparing the price forecasts submitted by subjects in two market environments: (a) all six traders are human subjects (6H), and (b) one human subject interacts with five profit-maximizing computer traders who assume all the traders are also maximizing profit (1H5C). The subjects are told explicitly about the behavioral assumption of the computer traders (in both 6H and 1H5C) as well as which environment they are in. Results from our experiments show that there is no significant difference between the distributions of the initial deviations of the forecast prices from the fundamental values in the two markets. However, as subjects learn by observing the realized prices, the magnitude of deviations becomes significantly smaller in 1H5C than in 6H markets. We also conduct additional experiments where subjects who have experienced the 1H5C market interact with five inexperienced subjects. The price forecasts initially submitted by the experienced subjects follow the fundamental value despite the fact that the subjects are explicitly told that the five other traders in the market are inexperienced subjects. These findings do not support the hypothesis that uncertainty about others’ rationality plays a major role in causing substantial deviation of forecast prices from the fundamental values in these asset market experiments.

Keywords: Rationality; Common knowledge; Experiment; Asset Markets; Computer Traders. (search for similar items in EconPapers)
JEL-codes: C90 D84 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2012-11-19
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1234

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