Motivations to speculate are the driving forces in experimental asset market bubbles

Steven Tucker and Yilong Xu

Working Papers in Economics from University of Waikato

Abstract: Research in Finance has long been intrigued by the causes of price bubbles. It has been argued that investors having doubts about the rationality of others may speculate on future capital gains. However, in an important contribution, Lei et al. (2001, Econometrica) argue that speculation is not the driver of bubbles in the absence of common knowledge of rationality, suggesting a focus on mistakes and confusion. Tucker and Xu (2024) revisit Lei et al.’s (2001) design, confirming the existence of bubbles, but argue that although their design removes the ability to speculate, it potentially introduces unintended design artifacts that may induce bubbles. We design a novel condition that eliminates incentives for speculation without these undesirable effects, which effectively eliminates bubbles even in the presence of confusion and/or lack of common expectations. We conclude that speculation plays a critical role in bubble formation, and thus does matter.

Keywords: speculation; bubbles; cognitive ability; asset market experiment (search for similar items in EconPapers)
JEL-codes: C91 G13 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2024-01-08
New Economics Papers: this item is included in nep-exp and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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