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Classroom Games: Speculation and Bubbles in an Asset Market

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  • Sheryl B. Ball
  • Charles A. Holt

Abstract

This paper describes a classroom exercise in which students trade assets of uncertain value in a sequence of market periods. Assets pay one-dollar dividends at the end of each period, but once the dividend is paid there is fixed probability that the asset will be destroyed. Dividends and probabilities are chosen so that the fundamental value is constant over time. Speculative bubbles can be caused by divergent expectations about other traders' valuations of the asset. This exercise provides an interactive framework that facilitates discussions of discounting, rational expectations, and backward induction.

Suggested Citation

  • Sheryl B. Ball & Charles A. Holt, 1998. "Classroom Games: Speculation and Bubbles in an Asset Market," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 207-218, Winter.
    • Handle: RePEc:aea:jecper:v:12:y:1998:i:1:p:207-18
    Note: DOI: 10.1257/jep.12.1.207
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.12.1.207
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    References listed on IDEAS

    as
    1. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
    2. Vernon L. Smith, 1964. "Effect of Market Organization on Competitive Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 78(2), pages 181-201.
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    More about this item

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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