Thar she bursts - Reducing confusion reduces bubbles

Michael Kirchler, Jürgen Huber and Thomas Stöckl ()

Working Papers from Faculty of Economics and Statistics, Universität Innsbruck

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.

Keywords: Experimental economics; asset market; bubble; market efficiency; confusion (search for similar items in EconPapers)
JEL-codes: C91 D03 (search for similar items in EconPapers)
Pages: 37
Date: 2011-03
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Thar She Bursts: Reducing Confusion Reduces Bubbles (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:inn:wpaper:2011-08

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