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The effect of earned vs. house money on price bubble formation in experimental asset markets

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

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: Can “house money” explain asset market bubbles? We test this hypothesis in an asset experiment with a certain dividend cash and shares is given to subjects initial portfolios are constructed using subject 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 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.

Date: 2013-02
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-ure
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Working Paper: The Effect of Earned vs. House Money on Price Bubble Formation in Experimental Asset Markets (2013) Downloads
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