To See is to Believe: Common Expectations in Experimental Asset Markets

28 Pages Posted: 20 Oct 2012

See all articles by Stephen L. Cheung

Stephen L. Cheung

The University of Sydney; IZA Institute of Labor Economics

Morten Hedegaard

Copenhagen University College - Department of Obstetrics; University of Copenhagen

Stefan Palan

University of Graz

Abstract

We challenge the recent claim that mispricing in the experimental asset markets introduced by Smith, Suchanek, and Williams (1988) is merely an artefact of confusion over declining fundamental value, and can be eliminated through appropriate training. We instead propose that when training is public knowledge, it reduces uncertainty over the behavior of others and facilitates the formation of common expectations. We disentangle the effect of training from the effect of its public knowledge, and find that when all subjects are trained to understand fundamental value, but this is not public knowledge, mispricing is as great as when training is absent.

Keywords: asset market experiment, price bubbles, common knowledge of rationality

JEL Classification: C92, D84, G12

Suggested Citation

Cheung, Stephen L. and Hedegaard, Morten and Hedegaard, Morten and Palan, Stefan, To See is to Believe: Common Expectations in Experimental Asset Markets. IZA Discussion Paper No. 6922, Available at SSRN: https://ssrn.com/abstract=2164651 or http://dx.doi.org/10.2139/ssrn.2164651

Stephen L. Cheung (Contact Author)

The University of Sydney ( email )

School of Economics
Social Sciences Building A02
Sydney, NSW 2006
Australia
+61 2 9351 2135 (Phone)
+61 2 9351 4341 (Fax)

HOME PAGE: http://https://sydney.edu.au/arts/economics/staff/profiles/stephen.cheung.php

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Morten Hedegaard

Copenhagen University College - Department of Obstetrics ( email )

Copenhagen
Denmark

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

Stefan Palan

University of Graz ( email )

Universitaetsstrasse 15/F2
Graz, 8010
Austria
+433163807306 (Phone)

HOME PAGE: http://academic.palan.biz

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