Cognitive bubbles

Ciril Bosch-Rosa, Thomas Meissner and Antoni Bosch-Domènech

No 2015-006, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Smith et al. (1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated by a large literature. Here we test whether the occurrence of bubbles depends on the experimental subjects' cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects' cognitive sophistication and classify them into low or high levels of cognitive sophistication. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble- crash patterns in the sessions populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects. This result lends strong support to the view that the usual bubbles and crashes in experimental asset markets are caused by subjects' confusion and, therefore, raises some doubts about the external validity of this type of experiments.

Keywords: Asset Market Experiment; Bubbles; Cognitive Sophistication (search for similar items in EconPapers)
JEL-codes: C91 D12 D84 G11 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Cognitive bubbles (2018)
Working Paper: Cognitive bubbles (2015)
Working Paper: Cognitive Bubbles
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2015-006

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