Thar She Blows: Rekindling Bubbles

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Thar She Blows Rekindling Bubbles

• David Porter
• Interdisciplinary Center for Economic Science
• George Mason University

2
Overview of the Experimental Environment

• The basic experimental set-up has the following
  features
• 15 period asset
• Dividend uncertainty
• 0,8,28,60
• Initial cash and shares
• Double Auction or Call market trading mechanism
• Trader experience

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A Different View
4
A Different View
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A Different View
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Bubble Characteristics

• Amplitude measures trough-to-peak change in
  asset value relative to fundamental value

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Bubble Characteristics

• Amplitude measures trough-to-peak change in
  asset value relative to fundamental value
• Duration measures the length, in periods, of
  increases in prices relative to fundamental value

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Bubble Characteristics

• Amplitude measures trough-to-peak change in
  asset value relative to fundamental value
• Duration measures the length, in periods, of
  increases in prices relative to fundamental value
• Turnover measures market trading activity

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Liquidity?
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Liquidity? Yes
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Liquidity? Yes
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Dividend Uncertainty? No
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Dividend Uncertainty? No and Yes
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Cohort Experience Seems To Do It

• Experience with same faces and same environment
  causes convergence to FV
• Cash exacerbates the bubble characteristics
• Dividend certainty speeds-up the process

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Experimental Design

• Dividends
• 0,8,28,60
• Initial Portfolios
• Average Portfolio is 4 shares and 720 cents in
  cash
• Twice Experienced
• Same cohort

• Dividends
• 0,1,8,28,98
• Initial Portfolios
• Average Portfolio is 2 shares and 1530 cents in
  cash
• Twice Experienced
• Mixed traders

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Lead-up (Inexp, 1-Exper)

• Replication with baseline
• Same cohort (5 cohorts 70 subjects) through 2
  experiments with baseline parameters
• Third time back
• Mixed the cohorts
• Changed the environment parameters

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Third Time is a Charm
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Third Time is a Charm
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Or is It?
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Or is It?
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Or is It?
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Results
(Intercept) Inexperienced Once-experienced Twice-experienced Rekindle R2
Amplitude 1.2576 (0.0571) t22.0245 N40 -0.4100 (0.1069) t-3.8353 N21 -1.1690 (0.1538) t-7.6007 N8 -0.0947 (0.2312) t-0.4094 N3 0.49
Duration 9.9024 (0.4110) t24.0934 N40 -3.3524 (0.7690) t-4.3594 N21 -7.0453 (1.1068) t-6.3654 N8 -4.8627 (1.4413) t-3.3739 N3 0.57
Turnover 3.0282 (0.1421) t21.3103 N40 -0.6448 (0.2658) t-2.4258 N21 -1.7482 (0.3825) t-4.5704 N8 -0.7581 (0.5972) t-1.2723 N3 0.20
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Conclusion

• Bubbles are pervasive and persistence
• Bubbles depend on the underlying environment
• Common static environment is a necessary
  condition for convergence to FV