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Nonspeculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality

Lei, Vivian and Noussair, Charles N. and Plott, Charles R. (2001) Nonspeculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality. Econometrica, 69 (4). pp. 831-859. ISSN 0012-9682.

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We 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 markets where speculation is possible, is due to the fact that there is no other activity available for participants in the experiment.

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Additional Information:© 2000 The Econometric Society. Manuscript received November, 1998; final revision received August, 2000. We thank the National Science Foundation, the Caltech Laboratory for Experimental Economics and Political Science, the Krannert School of Management, and the Center for International Business, Education and Research (CIBER) at Purdue University for Financial Support. This paper was presented at the Fall 1999 meetings of the Southern Economic Association. We thank Tim Cason, Eric Fisher, Peter Hansen, Rao Kadiyala, Dan Levin, Janet Netz, Jerry Thursby, Stefano della Vigna, Arlington Williams, Drew Fudenberg, and three anonymous referees, and seminar participants at Indiana University, Ohio State University, Stockholm University, the Institute for Industrial Economics in Stockholm, IUPUI, and Purdue University, for helpful comments.
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Caltech Laboratory of Experimental Economics and Political ScienceUNSPECIFIED
Krannert School of ManagementUNSPECIFIED
Center for International Business, Education and Research (CIBER)UNSPECIFIED
Subject Keywords:experiment, bubbles, asset market, speculation
Issue or Number:4
Record Number:CaltechAUTHORS:20140224-142529183
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Official Citation:Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality Vivian Lei, Charles N. Noussair and Charles R. Plott Econometrica , Vol. 69, No. 4 (Jul., 2001) , pp. 831-859 Published by: The Econometric Society Article Stable URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:43956
Deposited By: Susan Vite
Deposited On:24 Feb 2014 22:45
Last Modified:03 Oct 2019 06:13

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