Cognitive bubbles

Arbeitspapier

Smith et al. (1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated by a large literature. Here we test whether the occurrence of bubbles depends on the experimental subjects' cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects' cognitive sophistication and classify them into low or high levels of cognitive sophistication. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble- crash patterns in the sessions populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects. This result lends strong support to the view that the usual bubbles and crashes in experimental asset markets are caused by subjects' confusion and, therefore, raises some doubts about the external validity of this type of experiments.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2015-006

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Individual ; Consumer Economics: Empirical Analysis ; Expectations; Speculations ; Portfolio Choice; Investment Decisions
• Subject: Asset Market Experiment ; Bubbles ; Cognitive Sophistication

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bosch-Rosa, Ciril ; Meissner, Thomas ; Bosch-Domènech, Antoni
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/107908
• Last update: 10.03.2025, 11:42 AM CET