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Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles

Published online by Cambridge University Press:  01 June 2009

Lucy F. Ackert ,
Narat Charupat ,
Richard Deaves  and
Brian D. Kluger
Lucy F. Ackert
Affiliation:
Department of Economics and Finance, Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144 and Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309. lackert@kennesaw.edu
Narat Charupat
Affiliation:
charupat@mcmail.cis.mcmaster.ca
Richard Deaves
Affiliation:
DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, Ontario, Canada L8S 4M4. deavesr@mcmaster.ca
Brian D. Kluger
Affiliation:
College of Business, University of Cincinnati, 2925 Campus Green Drive, Cincinnati, OH 45221. brian.kluger@uc.edu
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Abstract

In 12 sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is the probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 3 , June 2009 , pp. 719 - 744
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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