Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?

Abstract

We report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and 'error' elimination by participants in a laboratory asset market and its effect on price bubbles. Our answer to the title question is: "yes."We impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium, and this treatment rekindles a bubble. However, in replications of that challenging environment across three experience levels we discover that the environment yields a rare residual tendency to bubble even in the third experience session. Therefore, a caveat must be placed on the effect of twice experienced subjects in asset markets: in order for price bubbles to be extinguished, the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters. Experience, including possible 'error' elimination, is not robust to major new environment changes in determining the characteristics of a price bubble.

Learning through passive participation in asset market bubbles

“…We obtain similar results using an alternate measure of absolute mispricing usually called amplitude (Hussam et al 2008); see Appendix III in ESM. No significant differences exist for asset market bubble duration or turnover.…”

“…One of the most robust results in the asset market bubble literature is the effect of experience, defined as previous participation in a similar laboratory asset market, on reducing bubbles (Xia et al 2012;Haruvy et al 2007;Dufwenberg et al 2005;Smith et al 1988;Van Boening et al 1993;King et al 1993). 1 However, experience in one market does not reliably transfer to another, and bubbles may re-emerge after changes to market parameters (Hussam et al 2008).…”

Bubbles, Crises, and Heterogeneous Beliefs

“…They made the intriguing finding that assets are often traded in high volume at prices substantially above their fundamental values. The same finding was later confirmed by many other studies under a variety of treatments (e.g., Porter and Smith (1995), Lei, Noussair, and Plott (2001), Dufwenberg, Lindqvist, and Moore (2005), Ackert, et al (2006), Haruvy and Noussair (2006), Haruvy, Lahav, and Noussair (2007), Hirota and Sunder (2007), and Hussam, Porter and Smith (2008)). …”

“…The experimental studies have identified short-sales constraints and investor experience as important factors for the appearance of asset bubbles. Ackert, et al (2006) and Haruvy and Noussair (2006) find that relaxing short-sales constraints tends to lower prices, while Dufwenberg, Lindqvist, and Moore (2005), Haruvy, Lahav, and Noussair (2007), and Hussam, Porter and Smith (2008), find that as traders gain more trading experience, the divergence in their price expectations is attenuated, and markets become thinner.…”

Rethinking Decision Usefulness

“…Even in the highly artificial and simplistic laboratory world, experienced traders cannot time market peaks or downturns (Haruvy, Lahav and Noussair, (2007). Experienced traders create bubbles over repeated periods, particularly if the highly constrained experimental parameters are changed moderately (Hussam, Porter, and Smith, 2008). recognized the problem of "irrational" discounting of future value, and recommended better education, particularly of the lower and laboring classes, whom they felt to be more subject to this form of "fallacious" thinking (Peart, 2000).…”