HEC Research Papers Series,
HEC Paris

Abstract: We study asset pricing and risk sharing in experimental financial markets designed to test rational choice and competitive behavior in complete markets. Participants behave competitively but deviate from rationality: approximately 25% of actions are first-order stochastically dominated. We propose a random-choice model predicting that market-clearing prices and average trades converge to the rational-choice competitive equilibrium as market size grows. Our experimental data support this convergence prediction. Structural estimation with CRRA utilities and logit choice probabilities reveals that approximately 20% of participants would have higher expected utility in autarky, suggesting bounded rationality can make market participation welfare-reducing for a significant minority.

Keywords: Asset Pricing; Risk Sharing; Experimental Financial Markets; Complete Markets; Convergence to Equilibrium; Random-Choice Model.

JEL-codes: C91; D81; G12

61 pages, First version: November 17, 2025. Revised: December 8, 2025.

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