The Effect of Earned vs. House Money on Price Bubble Formation in Experimental Asset Markets

Brice Corgnet, Roberto Hernan Gonzalez, Praveen Kujal and David Porter

Working Papers from Chapman University, Economic Science Institute

Abstract: Can “house money” explain asset market bubbles? We test this hypothesis in an asset market experiment with a certain dividend. We compare experiments where the initial portfolio of cash and shares is given to subjects, i.e. house money, to a treatment in which individual initial portfolios are constructed using subject earned money from a real effort task. We find that bubbles still occur; however trading volumes are significantly abated and the dispersion of earnings is significantly lower when subjects earn their starting endowments. We further investigate the role of cognitive ability in accounting for the differences in earnings distribution across treatments by using the Cognitive Reflection Test (CRT). We find that high CRT subjects earned more money on average than the initial value of their portfolio while low CRT subjects earned less. Subjects with low CRT scores were net purchasers (sellers) of shares when the price was above (below) fundamental value while the opposite was true for subjects with high CRT scores.

Pages: 45 pages
Date: 2013
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.chapman.edu/research-and-institutions/e ... d-vs-house-money.pdf

Related works:
Working Paper: The effect of earned vs. house money on price bubble formation in experimental asset markets (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:13-04

Access Statistics for this paper

More papers in Working Papers from Chapman University, Economic Science Institute Contact information at EDIRC.
Bibliographic data for series maintained by Megan Luetje ().