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Overconfidence and bubbles in experimental asset markets

Julija Michailova ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper relationship between the market overconfidence and occurrence of the stock-prices’ bubbles is investigated. Sixty participants traded in ten experimental markets of the two types: rational and overconfident. Markets are constructed on the basis of subjects’ overconfidence, measured in the administered pre-experimental psychological test sessions. The most overconfident subjects form overconfident markets, and the least overconfident – rational markets. Empirical evidence presented in the paper refines differences between market outcomes in the experimental treatments and suggests the connection between market overconfidence and market outcomes. Prices in rational markets tend to track the fundamental asset value more accurately than prices in overconfident markets, and are significantly lower and less volatile than the average overconfident prices. Strong positive correlation between market outcomes and overconfidence measures draws conclusion, that an increase in market overconfidence is associated with the increase in average price and trading activity. Large and significant correlation between bubble measures and measures of overconfidence provide additional evidence that overconfidence has significant effect on price and trading behavior in experimental asset markets.

Keywords: overconfidence; price bubbles; experimental asset market. (search for similar items in EconPapers)
JEL-codes: C92 G12 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-neu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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https://mpra.ub.uni-muenchen.de/26388/1/MPRA_paper_26388.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/30579/1/MPRA_paper_30579.pdf revised version (application/pdf)

Related works:
Working Paper: Overconfidence and bubbles in experimental asset markets (2014) Downloads
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