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Design-features of bubble-prone experimental asset markets with a constant FV
Christoph Huber1, Parampreet C Bindra2, Daniel Kleinlercher1
11Department of Banking and Finance, University of Innsbruck, Universitätsstrasse 15, 6020 Innsbruck, Austria.
Journal of the Economic Science Association
|January 3, 2020
Summary
Experimental asset markets can form bubbles. Visualizing price charts differently reduced overvaluation, but providing full fundamental value information did not impact bubble formation in this study.
Area of Science:
- Behavioral economics
- Experimental finance
Background:
- Experimental asset markets with constant fundamental value (FV) are increasingly studied.
- Existing research indicates these markets can generate speculative bubbles.
- A methodological examination of factors influencing experimental bubble formation is needed.
Purpose of the Study:
- To investigate the impact of specific design features on experimental asset market outcomes.
- To test whether visual price chart representation affects bubble formation.
- To determine if full information about the fundamental value process influences market behavior.
Main Methods:
- Conducted a laboratory experiment with 280 human subjects.
- Manipulated the visual display of the price chart.
- Provided subjects with complete information regarding the constant fundamental value (FV) process.
Main Results:
- Overvaluation and bubble formation were significantly reduced when trading prices were displayed at the upper end of the visual price chart.
- Providing subjects with full information about the FV process did not lead to a significant reduction in overvaluation or bubble formation.
- The visual presentation of market data appears to be a more influential factor than complete information disclosure.
Conclusions:
- Visual design elements in experimental asset markets can mitigate speculative bubble formation.
- Full disclosure of fundamental value information may not be sufficient to prevent bubbles in experimental settings.
- Future research should explore the cognitive and behavioral mechanisms underlying these design effects.
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