Resolving Persistent Uncertainty by Self-Organized Consensus to Mitigate Market Bubbles

Didier Sornette, Sandra Andraszewicz, Ryan O. Murphy, Philipp B. Rindler and Dorsa Sanadgol
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Didier Sornette: Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)
Sandra Andraszewicz: ETH Zurich
Ryan O. Murphy: University of Zurich - Department of Economics
Philipp B. Rindler: EBS Universität für Wirtschaft und Recht - EBS Business School
Dorsa Sanadgol: ETH Zurich

No 16-08, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose a new paradigm to study coordination in complex social systems, such as financial markets, that accounts for fundamental uncertainty. This new context has features from prediction markets that have been shown previously to mitigate price bubbles in classical asset market experiments. Our setup is more realistic as it offers multiple securities that are continuously traded over days and, importantly, there is no "true" underlying price. Nonetheless, the market is designed such that its rationality can be evaluated. Quick consensus emerges early yielding pronounced market bubbles. The overpricing diminishes over time, indicating learning, but does not disappear completely. Traders' price estimates become progressively more independent via a collective realization of communal ignorance, pushing the market much closer to rationality, with forecasts that are close to the realized outcomes.

Keywords: Experimental Economics; Experimental Asset Market; Bubble; Uncertainty; Complete Contingent Market (search for similar items in EconPapers)
JEL-codes: C18 C90 C92 D70 D81 G17 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-02
New Economics Papers: this item is included in nep-exp and nep-hpe
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1608

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