Abstract
We study the emergence of bubbles in a laboratory experiment with large groups of individuals. The realized price is the aggregation of the forecasts of a group of individuals, with positive expectations feedback through speculative demand. When prices deviate from fundamental value, a random selection of participants receives news about overvaluation. Our findings are: (i) large asset bubbles are robust in large groups, (ii) information contagion through news affects behaviour and may break the coordination on a bubble, (iii) time varying heterogeneity provides an explanation of bubble formation and crashes, and (iv) bubbles are strongly amplified by coordination on trend-extrapolation.
Highlights
Expectations play an important role for intertemporal decisions in everyday economic life
A common objection to financial market and macroeconomic experiments is that laboratory markets are small and individual decisions may have a stronger influence on aggregate outcomes than in real markets
In this paper we study expectation formation and coordination on asset bubbles in large and small (6 participants) experimental markets
Summary
Expectations play an important role for intertemporal decisions in everyday economic life. Based on their expectations about the future, agents decide on what actions to take today. Since Muth (1961) and Lucas (1972) the traditional approach has become the Rational Expectations (RE) hypothesis, which states that the expectations of all agents are the same and consistent with their model of the economy. Alternative models of expectations assume that agents are boundedly rational (Sargent 1993), are prone to behavioral biases (Barberis and Thaler 2003), form expectations through an adaptive learning process (Evans and Honkapohja 2001; Branch and Evans 2010) or use simple, but ‘smart’ heuristics (Anufriev et al 2019)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
