Asset market bubbles in an experiment with sequential information releases

Much of the author’s understanding of experimental asset market bubbles is based on the Smith, Suchanek and Williams (SSW) design. The purpose of this paper is to find alternative bubble-producing designs, which is a promising path for new insights.

The Smith et al. (1988) experimental design has been widely used to study bubbles. This paper introduces a novel modification, where the asset has a binary liquidation value and no dividends. Dividends are replaced by the events affecting the liquidation value probability distribution.

Overpricing is common and consistent with subject optimism concerning the random liquidation value. Bubbles are also observed, as the degree of overpricing often rises and then fall during the experiments. However, crashes where the asset price drops below fundamental values are not observed.

Subject over optimism, speculation and/or subject confusion are possible bubble ingredients. More research is needed to determine how much the factors responsible for these bubbles differ from the factors responsible for the SSW design. However, it seems likely that there are at least some common factors given the structural similarities between the two designs.

The present design is novel and may provide a means to better generalize results from previous experiments based on the SSW design.