Hommes, C., Sonnemans, J., Tuinstra, J. and van de Velden, H. (2008). Expectations and bubbles in asset pricing experiments Journal of Economic Behavior and Organization, 67(1):116--133.
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Affiliated authors
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Publication year2008
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JournalJournal of Economic Behavior and Organization
We present results on expectation formation in a controlled experimental environment. In each period subjects are asked to predict the next price of a risky asset. The realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts. In most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously. These bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or 'positive feedback expectations' of the participants. We also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy.