Kiel Working Papers, Kiel Institute for World Economics
No 1729:
Overconfidence and Bubbles in Experimental Asset Markets
Julija Michailova and Ulrich Schmidt
Abstract: This paper investigates the relationship between market
overconfidence and occurrence of stock-price bubbles. Sixty participants
traded stocks in ten experimental asset markets. Markets were constructed
on the basis of subjects’ overconfidence, measured in pre-experimental
sessions. The most overconfident subjects form “overconfident markets”, and
the least overconfident subjects “rational markets”. Prices in rational
markets tend to track the fundamental asset value more accurately than
prices in overconfident markets and are significantly lower and less
volatile. Additionally we observe significantly higher bubble measures and
trading volume on overconfident markets. Altogether, our data provide
evidence that overconfidence has strong effects on prices and trading
behavior in experimental asset markets
Keywords: overconfidence, price bubbles, experimental asset market; (follow links to similar papers)
JEL-Codes: C92,; G12; (follow links to similar papers)
35 pages, September 2011
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