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League-Table Incentives and Price Bubbles in Experimental Asset Markets

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  • Cheung, Stephen L.

    (University of Sydney)

  • Coleman, Andrew

    (University of Sydney)

Abstract

We study experimental markets in which participants face incentives modeled upon those prevailing in markets for managed funds. Each participant's portfolio is periodically evaluated at market value and ranked in a league table according to short-term paper returns. Those who rank highly attract a larger share of new fund inflows. Under conditions in which prices are close to intrinsic value, the effect of incentives is mild. However under conditions in which markets are prone to bubble, mispricing is greatly exacerbated by incentives. Even in experienced markets, prices climb to levels clearly indicative of speculation and do not always crash back.

Suggested Citation

  • Cheung, Stephen L. & Coleman, Andrew, 2011. "League-Table Incentives and Price Bubbles in Experimental Asset Markets," IZA Discussion Papers 5704, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp5704
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    Cited by:

    1. Stéphane Robin & Kateřina Strážnická & Marie Claire Villeval, 2021. "Bubbles and incentives: an experiment on asset markets," Economic and Political Studies, Taylor & Francis Journals, vol. 9(1), pages 68-89, January.
    2. Stöckl, Thomas & Huber, Jürgen & Kirchler, Michael & Lindner, Florian, 2015. "Hot hand and gambler's fallacy in teams: Evidence from investment experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 327-339.
    3. Cheung, Stephen L. & Coleman, Andrew, 2011. "League-Table Incentives and Price Bubbles in Experimental Asset Markets," IZA Discussion Papers 5704, Institute of Labor Economics (IZA).
    4. Schoenberg, Eric J. & Haruvy, Ernan, 2012. "Relative performance information in asset markets: An experimental approach," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1143-1155.
    5. 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.
    6. Giamattei, Marcus & Huber, Jürgen & Lambsdorff, Johann Graf & Nicklisch, Andreas & Palan, Stefan, 2020. "Who inflates the bubble? Forecasters and traders in experimental asset markets," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    7. repec:grz:wpsses:2013-04 is not listed on IDEAS

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    More about this item

    Keywords

    tournament incentives; managed funds markets; price bubbles; league tables; asset market experiments;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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