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

Vivian Lei, Charles N. Noussair, Charles R. Plott

Research output: Contribution to journalArticlepeer-review

229 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)831-859
Number of pages29
JournalEconometrica
Volume69
Issue number4
DOIs
StatePublished - 2001
Externally publishedYes

Keywords

  • Asset market
  • Bubble
  • Experiment
  • Speculation

ASJC Scopus subject areas

  • Economics and Econometrics

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