Dividend timing and behavior in laboratory asset markets

Smith, Vernon L.; Boening, Mark Van; Wellford, Charissa P.

doi:10.1007/978-3-642-56448-2_7

Cited by 50 publications

(54 citation statements)

References 17 publications

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“…Bubbles emerge when traders err collectively in pricing, causing a persistent misfit between the market price and the true value (also known as "intrinsic" or "fundamental" value) of an asset, such as a stock (7,8). Bubbles devastate individuals and markets, wreck nations, and destabilize the entire world economy.…”

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confidence: 99%

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Ethnic diversity deflates price bubbles

Levine

Apfelbaum

Bernard

et al. 2014

Proc. Natl. Acad. Sci. U.S.A.

222

126

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Significance Markets are central to modern society, so their failures can have devastating effects. Here, we examine a prominent failure: price bubbles. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. Using experimental markets in Southeast Asia and North America, we find a marked difference: Market prices fit true values 58% better in diverse markets. In homogenous markets, overpricing is higher and traders’ errors are more correlated than in diverse markets. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. Informing public discussion, our findings suggest that diversity facilitates friction that enhances deliberation and upends conformity.

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confidence: 99%

“…However, even there-with skilled participants who possess complete information about the true values of the stocks traded-bubbles persist (7,8). Researchers have shown that bubbles are related to financial conditions such as excess cash (10), but also to behavior that exhibits "elements of irrationality" (11).…”

mentioning

confidence: 99%

Ethnic diversity deflates price bubbles

Levine

Apfelbaum

Bernard

et al. 2014

Proc. Natl. Acad. Sci. U.S.A.

222

126

View full text Add to dashboard Cite

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“…Porter and Smith (1995), Smith, van Boening, and Wellford (2000), Noussair, Robin, and Rueux (2001), and price and FV may be due to a lack of common, not irrational, expectations (p. 1120), and that it is the failure of the assumption of common expectations, not backward induction incompetence by subject agents that explains bubbles (p. 1148, emphasis added). That is, although the dividend structure of the asset was made public knowledge by the experimenter, each subject might still have been uncertain as to how others would use that information.…”

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confidence: 99%

To see is to believe: Common expectations in experimental asset markets

Cheung

Hedegaard

Palan

2014

European Economic Review

103

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“…The work by Caginalp et al (9) finds that deviations from fundamental value increase as the ratio of endowed cash to share value increase. Smith et al (10) find that deviations from fundamental value disappear when all dividends are deferred to the end. This finding is confirmed by Kirchler et al (11) but much extended by showing that a key element in the creation of bubbles is the decline in fundamental value relative to a constant average inflow of cash dividends; they also examine instructions as a treatment to increase subject understanding of their declining assert value environment.…”

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confidence: 99%

Commodity durability, trader specialization, and market performance

Dickhaut

Lin

Porter

et al. 2012

Proc. Natl. Acad. Sci. U.S.A.

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The original double auction studies of supply and demand markets established their strong efficiency and equilibrium convergence behavior using economically unsophisticated and untrained subjects. The results were unexpected because all individual costs and values were private and dependent entirely on the market trading process to aggregate the dispersed information into socially desirable outcomes. The exchange environment, however, corresponded to that of perishable, and not re-traded goods in which participants were specialized as buyers or sellers. We report experiments in repeated single-period markets where tradability, and buyer-seller role specialization, is varied by imposing or relaxing a restriction on re-trade within each period. In re-trade markets scope is given to speculative motives unavailable where goods perish on purchase. We observe greatly increased trade volume and decreased efficiency but subject experience increases efficiency. Observed speculation slows convergence by impeding the process whereby individuals learn from the market whether their private circumstances lead them to specialize as buyers or sellers.durable goods | specialization of trade | speculation and liquidity E quilibrium between supply and demand (S&D) based on subjective marginal unit value was first articulated by Jevons (1) in 1862.* The model is here characterized by buyers whose consumption values vary for a commodity and sellers who can supply the commodity at varying costs. When a buyer buys a unit, both buyer and seller earn a private surplus. There exists a price at which quantity demanded equals quantity supplied defined as the equilibrium price and quantity. At this price, the total social surplus is maximized, and full efficiency is achieved. Jevons (3) believed that this theoretical equilibrium would not be achievable unless all participants had "perfect knowledge of the conditions of supply and demand, and the consequent ratio of exchange" or price (3).The theory was tested in the laboratory one century later, yielding the unanticipated result of rapid convergence to efficient outcomes. Naïve subjects, learning through experience and informed only of their own marginal value (cost) information, have no prevision of the S&D equilibrium, but they discover it by sequential adjustment of their trades (4). Until experimental research established that the perfect knowledge conditions were neither necessary nor sufficient for empirical S&D equilibrium to be closely approximated by untrained subjects, Jevons' belief was widely accepted in economics [proposition 6 in the work by Smith (5)].These experiments share characteristics common to nondurable consumer goods and services in the national economy (e.g., hamburgers and haircuts): buyers and sellers who are specialized in their roles do not retrade, have premarket knowledge of their role, and values are realized immediately on purchase or sale. As we move from services and other items that perish with their purchase to goods durable enough to be retraded, the pa...

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Dividend timing and behavior in laboratory asset markets

Cited by 50 publications

References 17 publications

Ethnic diversity deflates price bubbles

Ethnic diversity deflates price bubbles

To see is to believe: Common expectations in experimental asset markets

Commodity durability, trader specialization, and market performance

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