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Super-Exponential Bubbles in Lab Experiments: Evidence for Anchoring Over-Optimistic Expectations on Price

Author

Listed:
  • Andreas D. Huesler

    (ETH Zürich)

  • Didier Sornette

    (ETH Zürich and Swiss Finance Institute)

  • C. H. Hommes

    (University of Amsterdam, CeNDEF, and Tinbergen Institute)

Abstract

We analyze a controlled price formation experiment in the laboratory that shows evidence for bubbles. We calibrate two models that demonstrate with high statistical significance that these laboratory bubbles have a tendency to grow faster than exponential due to positive feedback. We show that the positive feedback operates by traders continuously upgrading their over-optimistic expectations of future returns based on past prices rather than on realized returns.

Suggested Citation

  • Andreas D. Huesler & Didier Sornette & C. H. Hommes, 2012. "Super-Exponential Bubbles in Lab Experiments: Evidence for Anchoring Over-Optimistic Expectations on Price," Swiss Finance Institute Research Paper Series 12-20, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1220
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    More about this item

    Keywords

    rational expectations; financial bubbles; speculation; anchoring; laboratory experiments; behavioral model; super-exponential growth; positive feedback; behavioral 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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