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Atlanta Fed Working Papers


The Origins of Bubbles in Laboratory Asset Markets

Lucy F. Ackert, Narat Charupat, Richard Deaves, and Brian D. Kluger
Working Paper 2006-6
May 2006

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In twelve 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 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. When these tests indicate the presence of probability judgment error and speculation, bubbles are more likely to occur. This finding suggests that both factors are important bubble drivers.

JEL classification: C91, C92

Key words: bubbles, asset markets, judgment error


The authors are grateful to Bryan Church, Charles Noussair, Chuck Schnitzlein, and David Stolin as well as seminar participants at Groupe ESC Toulouse and the Cass Business School for helpful suggestions. Financial support provided by the Federal Reserve Bank of Atlanta and Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Lucy F. Ackert, Department of Economics and Finance, Michael J. Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144, 770-423-6111, lackert@kennesaw.edu, and Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470; Narat Charupat, Michael G. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, Ontario, Canada L8S 4M4, 905-525-9140, ext. 23987, charupat@mcmail.cis.mcmaster.ca; Richard Deaves, Michael G. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, Ontario, Canada L8S 4M4, deavesr@mcmaster.ca; or Brian D. Kluger, College of Business, University of Cincinnati, Cincinnati, OH 45221-0195, brian.kluger@uc.edu.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.