Experience Does not Eliminate Bubbles: Experimental Evidence

Abstract

We study the role of experience in the formation of asset price bubbles. Therefore, we conduct two related experiments. One is a call market experiment in which participants trade assets with each other. The other is a learning-to-forecast experiment in which participants only forecast future prices, while the trade, which is based on these forecasts, is computerized. Each experiment comprises three treatments that vary the amount of information about the fundamental value that participants receive. Each market is repeated three times. In both experiments and in all treatments, we observe sizable bubbles. These bubbles do not disappear with experience. Our findings in the call market experiment stand in contrast to the literature. Our findings in the learningto-forecast experiment are novel. Interestingly, the shape of the bubbles is different between the two experiments. We observe flat bubbles in the call market experiment and boom-and-bust cycles in the learning-to-forecast experiment.

Behavioral Optimal Taxation: The Case of Aspirations

“…In the experiments I conducted (Weber and Schram, 2017;Weber, 2017;Hommes et al, 2017;Weber et al, 2018;Kopányi-Peuker and Weber, 2018), the results always differ decisively from full rationality (the only experiment that also finds some support for rational behavior is the bond pricing experiment, Weber et al, 2018, where first-round prices are far from the equilibrium, but aggregate outcomes in the last round of the experiment are surprisingly close to the rational equilibrium).…”

Learning to deal with repeated shocks under strategic complementarity: An experiment

“…Albeit robust in stationary environments, experience effects are argued to be sensitive to the complexity of the environment. For instance, in the AME and LtFE studies by Kopányi-Peuker and Weber (2018) and Hussam et al (2008), bubbles do not disappear despite repetition. 7 Hussam et al (2008) also report that bubbles reignite even with twice-experienced subjects following drastic changes in the environment (e.g., the amount of liquidity in the market).…”

“…According toKopányi-Peuker and Weber (2018), a possible explanation is that this occurs because interactions in their experiment have an indefinite horizon.8 Bao et al (2012) study large nonidentical shocks in LtFEs by introducing two large shocks to the rational expectations (RE) equilibrium. However, their design does not propose a way to test the effect of nonidentical shocks with respect to identical ones.…”

Asset price volatility and investment horizons: An experimental investigation

“…One way around this problem would be to let the realized price be a function of the median, instead of the average, forecast, as in Arifovic and Petersen (2017). Another possibility would be to exclude forecasts that deviate too much from the last price when determining the average forecast, as in Kopányi-Peuker and Weber (2019). Whereas both procedures mitigate the effect of extreme predictions, they are not consistent with the underlying asset pricing model.…”