The Creation and Control of Speculative Bubbles in a Laboratory Setting

House-Money Effects in Experimental Asset Markets

“…House money effects have previously been studied in an experimental asset market setting by Schwarz and Aug (1989), Ackert et al (2006), and Ang et al (2010).…”

“…Corgnet et al (2013) also point out that asking participants to bring their own money may induce a selection bias, whereby predominantly risk-seeking types who are happy to lose their money self-select into the subject pool. In addition, the results of Ang et al (2010) are based on a very small sample size (2 sessions), owing to the fact that their examination of house-money effects is a robustness test, rather than the focus of their study. Instead of requiring participants to use their own money, Ackert et al (2006) vary the size of the endowment given to participants, and detect a significant house-money effect on asset prices in their experimental market.…”

“…Earlier studies on house-money effects in experimental market settings are sparse and provide conflicting evidence. While Schwarz and Ang (1989, in Porter andSmith, 1995) and Ang et al (2010) do not find a significantly dampened bubble-andcrash pattern to their prices even when participants are required to trade with their own money (which may or may not be earned), Ackert et al (2006) report a tendency for prices to be significantly higher (and remain so) in markets in which participants are given larger endowments. However, the comparability of such studies is complicated by the fact that they use significantly different experimental designs.…”

Bubbles and Crashes in Experimental Asset Markets

“…1 Introduction and Motivation Figure 1 above gives an example for such a price pattern that has ex post been labeled a bubble-and-crash pattern in a number of studies (e.g., West (1988), Ang et al (1992), Caginalp et al (2000a), Westerhoff (2003)). Such bubbles and crashes in financial markets are no phenomenon unique to modern financial systems or highly interconnected marketplaces.…”

“…They converted their artificial currency "francs" into dollars by calculating the payoffs for a given year as a þ bx, where x was the quantity of francs held by a subject at the end of a trading year, b > 0 was a factor for the conversion of francs to dollars 64 and a < 0 were fixed costs which approximately equaled the initial cash endowment. 65 Ang et al (1992) offered significant additional bonus payments to those of their subjects earning the highest profits in the first periods of a two-period-asset experiment, with the aim to shorten their investment horizons along the lines of portfolio managers in the investment community. 25-26.…”