Classroom Games: Speculation and Bubbles in an Asset Market

Sheryl Ball and Charles Holt

Journal of Economic Perspectives, 1998, vol. 12, issue 1, 207-218

Abstract: This paper describes a classroom exercise in which students trade assets of uncertain value in a sequence of market periods. Assets pay one-dollar dividends at the end of each period, but once the dividend is paid there is fixed probability that the asset will be destroyed. Dividends and probabilities are chosen so that the fundamental value is constant over time. Speculative bubbles can be caused by divergent expectations about other traders' valuations of the asset. This exercise provides an interactive framework that facilitates discussions of discounting, rational expectations, and backward induction.

JEL-codes: A22 G12 (search for similar items in EconPapers)
Date: 1998
Note: DOI: 10.1257/jep.12.1.207
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Citations: View citations in EconPapers (35)

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