JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. NONSPECULATIVE BUBBLES IN EXPERIMENTAL ASSET MARKETS: LACK OF COMMON KNOWLEDGE OF RATIONALITY VS. ACTUAL IRRATIONALITY BY VIvIAN LEI, CHARLES N. NOUSSAIR, AND CHARLES R. PLOTT1We report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets. In a setting in which speculation is not possible, bubbles and crashes are observed. The results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation, but rather by behavior that itself exhibits elements of irrationality. Much of the trading activity that accompanies bubble formation, in maikets where speculation is possible, is due to the fact that there is no other activity available for participants in the experiment.

We report the results of an experiment that demonstrates that market experience is not necessary to eliminate bubbles in the type of asset markets studied in Smith et�al. (1988) . We introduce a pre-market phase in which subjects experience a dividend flow themselves by literally observing and receiving dividends for 12 periods. The robust bubble-crash phenomenon never occurs in our experiment. Our results provide strong evidence that so long as a majority of the subjects have full understanding of the structure of the dividend, market efficiency can be ensured. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Asia Pty Ltd

In this article, we adopt a variant of the trust game by Berg, Dickhaut, and McCabe (1995) and the dictator game by Cox (2004) to determine if income inequality can activate in‐group favoritism and, if so, whether such a bias is strong enough to survive the removal of income inequality. We find evidence of in‐group favoritism only on the part of rich first movers. Rich first movers trust their in‐group members significantly more in the presence of income inequality not only before but also after they gain enough experience. Poor first movers, in contrast, do not exhibit such in‐group bias. They do not discriminate between in‐group and out‐group at the very outset of the experiment, and once they become experienced, they behave with significantly more trust toward the rich than toward the poor. We also find that in‐group and out‐group favoritism established in the past can be alleviated, but not completely removed, by an equal income distribution.