The Effects of Subject Pool and Design Experience on Rationality in Experimental Asset Markets

Lucy F. Ackert and Bryan K. Church
Federal Reserve Bank of Atlanta
Working Paper 98-18
September 1998

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Empirical evidence suggests that prices do not always reflect fundamental values and individual behavior is often inconsistent with rational expectations theory. We report the results of fourteen experimental markets designed to examine whether the interactive effect of subject pool and design experience tempers price bubbles and improves forecasting ability. Our main findings are: (i) price run-ups are modest and dissipate quickly when traders are knowledgeable about financial markets and have design experience; (ii) price bubbles moderate quickly when only a subset of traders are knowledgeable and experienced; and (iii) individual forecasts of price are not consistent with the predictions of the rational expectations model in any market.

JEL classification: C92, G14

Key words: asset markets, bubbles, rationality

The authors acknowledge the research support of the Social Sciences and Humanities Research Council of Canada. They also thank Jerry Dwyer and workshop participants at Georgia State University for helpful comments and Karen Butler, Betty Soares, and Shawna White for research assistance. The views expressed here are those of 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, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, NW, Atlanta, Georgia 30303-2713, 404/498-8783, 404/498-8810 (fax),; or Bryan K. Church, DuPree College of Management, Georgia Institute of Technology, Atlanta, Georgia 30332, 404/894-3907,