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To see is to believe: Common expectations in experimental asset markets

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  • Cheung, Stephen L.
  • Hedegaard, Morten
  • Palan, Stefan

Abstract

We experimentally manipulate agents' information regarding the rationality of others in a setting in which previous studies have found irrationality to be present, namely the asset market experiments introduced by Smith et al. (1988). Recent studies suggest that mispricing in such markets may be an artefact of confusion, which can be reduced by training subjects to understand the diminishing fundamental value. We reconsider this view, and propose that when it is made public knowledge that training has occurred, this may also reduce uncertainty over the behavior of others and facilitate the formation of common expectations. Our design disentangles the direct effect of training from the indirect effect of its public knowledge, and our results demonstrate a distinct and statistically significant effect of public knowledge over and above that of training alone.

Suggested Citation

  • Cheung, Stephen L. & Hedegaard, Morten & Palan, Stefan, 2014. "To see is to believe: Common expectations in experimental asset markets," European Economic Review, Elsevier, vol. 66(C), pages 84-96.
    • Handle: RePEc:eee:eecrev:v:66:y:2014:i:c:p:84-96
    DOI: 10.1016/j.euroecorev.2013.11.009
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    More about this item

    Keywords

    Asset market experiment; Mispricing; Confusion; Common expectations;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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