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Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles

Lucy Ackert (), Narat Charupat, Richard Deaves and Brian D. Kluger

Journal of Financial and Quantitative Analysis, 2009, vol. 44, issue 03, 719-744

Abstract: In 12 sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is the probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).

Date: 2009
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