On booms that never bust: Ambiguity in experimental asset markets with bubbles

Abstract

We study the effect of ambiguity on the formation of bubbles and on the occurrence of crashes in experimental asset markets à la Smith, Suchanek, and Williams (1988). We extend their framework to an environment where the fundamental value of the asset is ambiguous. We show that, when the fundamental value is ambiguous, asset prices tend to be lower than when it is risky although bubbles form in both the ambiguous and the risky environments. Additionally, bubbles do not crash in the ambiguous case whereas they do so in the risky one. These findings regarding depressed prices and the absence of crashes in the presence of ambiguity are in line with recent theoretical work stressing the crucial role of ambiguity to account for surprisingly low equity prices (high returns) as well as herding in asset markets.

Individual attitudes and market dynamics towards imprecision

“…through the order book; see Füllbrunn et al, 2014, for example) than towards the end. With regard to imprecision in probabilities (i.e., ambiguity), we thus find a significantly negative deviation from expected fundamentals during the last third of trading, which confirms results by Weber (1989),Weber (1993), andCorgnet et al (2020), but contrasts with work by, for example,Corgnet et al (2013) andFüllbrunn et al (2014).…”

“…For cells with a checkmark ( ), there is literature available and we provide a conceptual replication; for cells with an empty square ( ) there is no literature available yet and the present study is the first to explore this topic. a See, e.g., Eisenberger and Weber (1995), Chow and Sarin (2001), Budescu et al (2002), Du and Budescu (2005), Borghans et al (2009), Onay et al 2013; b See, e.g., Eisenberger and Weber (1995), Chow and Sarin (2001), Budescu et al (2002), Du and Budescu (2005), Borghans et al (2009), Onay et al (2013); c Budescu et al (2002), Du and Budescu (2005), Onay et al 2013; d Budescu et al (2002), Du and Budescu (2005), Onay et al (2013); e Camerer andKunreuther (1989), Weber (1989), Sarin and Weber (1993), Bossaerts et al (2010), Corgnet et al (2013), Füllbrunn et al (2014, Corgnet et al (2020); f Camerer andKunreuther (1989), Weber (1989), Sarin and Weber (1993), Bossaerts et al (2010), Corgnet et al (2013), Füllbrunn et al (2014, Corgnet et al (2020).…”

“…Recent contributions to the experimental asset pricing literature with regard to ambiguity also includeBossaerts et al (2010), whose findings suggest significant ambiguity effects in the context of portfolio choice; as well asCorgnet et al (2013), who analyze trader reaction to ambiguity when dividend information is only revealed sequentially over three experimental periods. Their results suggest only a limited role of ambiguity in explaining financial market anomalies Corgnet et al (2020),. in contrast, report lower asset prices with an ambiguous fundamental value than in a risky one in a market experiment designed to examine bubble formation.…”

Does Mining Fuel Bubbles? An Experimental Study on Cryptocurrency Markets

“…Chen and Epstein, 2002;Ju and Miao, 2012), it would be interesting to study its implications on cryptocurrency markets. Füllbrunn et al (2014) do not find effects in market experiments comparing ambiguity and risk, while Corgnet et al (2020) observe that bubbles are less pronounced and do not crash when assets' fundamentals are ambiguous. The specific context of cryptocurrency markets has so far not been investigated.…”

Stochastic Choice and Imperfect Judgments of Line Lengths: What Is Hiding in the Noise?

“…15 Still others incentivize judgments of uncountable stimuli to test models of decision making: Tsetsos, Moran, Moreland, Chater, Usher, and Summer…eld (2016) employ rectangles of dynamic size, Payzan-LeNestour and Woodford (2022) employ shades of grey, and Shevlin, Smith, Hausfeld, and Krajbich (2022) employ arrays of color shades. Finally, some incentivize judgments of imperfectly perceived stimuli to add realism to experimental settings : Corgnet, Hernán-González, and Kujal (2020) employ color shade in an experimental asset market and Goryunov and Rigos (2022) employ the spatial location of a dot to represent the state space in a game. 16 Above we list papers that describe incentivized experiments with designs involving imperfectly perceived stimuli to study choice.…”