Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles
Economics, Finance, & Quantitative Analysis
In 12 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 the 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. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).
Ackert, Lucy F., Narat Charupat, Richard Deaves, and Brian D. Kluger (2009). "Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles." Journal of Financial and Quantitative Analysis, 44, pp 719-744.