Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?

• Published in: The American economic review Vol. 98; no. 3; pp. 924 - 937
• Main Authors: Hussam, Reshmaan N., Porter, David, Smith, Vernon L.
• Format: Journal Article
• Language: English
• Published: Nashville American Economic Association 01.06.2008
• Subjects: Asset markets; Bubbles; Cash; Dividend distributions; Dividends; Economic bubbles; Economic psychology; Equilibrium; Error; Experimental psychology; Experimental replication; Experiments; Financial speculation; Fundamental value; Knowledge; Laboratories; Learning; Liquidity; Market prices; Market value; Rationality; Securities markets; Securities prices; Short sales; Studies; Uncertainty
• ISSN: 0002-8282; 1944-7981
• DOI: 10.1257/aer.98.3.924

We report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and "error" elimination among participants in a laboratory asset market and its effect on price bubbles. Our answer to the title question is: "yes." We impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium, and this treatment rekindles a bubble. However, in replications of that same challenging environment across three experience levels, we discover that the environment yields a rare residual tendency to bubble even in the third experience session. Therefore, a caveat must be placed on the effect of twice-experienced subjects in asset markets: in order for price bubbles to be extinguished, the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters. Experience, including possible "error" elimination, is not robust to major new environment changes in determining the characteristics of a price bubble.