Confidence and decision-making in experimental asset markets

Nicolás Aragón and Rasmus Pank Roulund

Journal of Economic Behavior & Organization, 2020, vol. 178, issue C, 688-718

Abstract: This paper examines how traders’ confidence and market confidence affect outcomes in an experimental asset market with known fundamental values. In this type of market, prices usually present large deviations from the fundamental value; in other words, bubbles are known to occur. We measure beliefs by asking participants to forecast the one-period-ahead price as a discrete probability mass distribution. We define confidence as the inverse of the dispersion of beliefs for each trader, and also create a market-wide measure of this to measure agreement across traders. We find that confidence affects price-formation and is also important in explaining the dynamics and size of the bubble. Moreover, as traders are successful they become increasingly certain of their beliefs, even if these beliefs are on non-fundamental values, thus increasing the likelihood of price bubbles.

Keywords: Confidence; Expectations; Bubbles; Experimental asset markets; Overconfidence (search for similar items in EconPapers)
JEL-codes: C90 G11 G12 G40 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:178:y:2020:i:c:p:688-718

DOI: 10.1016/j.jebo.2020.07.032

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