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

Brice Corgnet, Roberto Hernán-González, Praveen Kujal and David Porter
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Roberto Hernán-González: UGR - Universidad de Granada = University of Granada
Authors registered in the RePEc Author Service: Roberto Hernán González

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Abstract: Does house money exacerbate price bubbles? We compare house money asset market experiments with an earned money treatment where initial portfolios are constructed from a real effort task. Bubbles occur; however, trading volumes and earnings dispersion are significantly higher with house money. We investigate the role of cognitive ability in accounting for the differences in earnings distribution across treatments by using the cognitive reflection test (CRT). Low CRT subjects earned less than high CRT subjects. Low CRT subjects were net purchasers (sellers) of shares when the price was above (below) fundamental value. The opposite was true for high CRT subjects.

Date: 2015-07-01
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Published in Review of Finance, 2015, 19 (4), 1455-1488 p. ⟨10.1093/rof/rfu031⟩

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Journal Article: The Effect of Earned Versus House Money on Price Bubble Formation in Experimental Asset Markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02311955

DOI: 10.1093/rof/rfu031

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