Thar She Blows: Rekindling Bubbles

Outline of Presentation Standard Results from 20 Years of Bubble Experiments Environmental Influences on Bubble Characteristics Experimental Design Results Conclusions

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

Fundamental Value Line Period 1: 24 x 15 =360

Fundamental Value Line =336 for Period 2

Fundamental Value Line

Inexperience Traders Time Series

A Different View

Bubble Characteristics Amplitude: measures trough-to-peak change in asset value relative to fundamental value

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

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

Estimates of Bubble Characteristics Amplitude i = Intercept + β 1 Once-experienced i + β 2 Twice-experienced i Duration i = Intercept + β 1 Once-experienced i + β 2 Twice-experienced i Turnover i = Intercept + β 1 Once-experienced i + β 2 Twice-experienced i

Results (Intercept) Inexperienced Once- experienced Twice- experienced R2R2 Amplitude (0.0643) t= N= (0.1122) t= N= (0.1683) t= N= Duration (0.3967) t= N= (0.6928) t= N= (1.0388) t= N= Turnover (0.1591) t= N= (0.2778) t= N= (0.4165) t= N=8 0.27

What Has an Effect on the Bubbles? Trader Background? No

Short-Selling? No

Liquidity?

Liquidity? Yes

Results (Intercept) Inexperienced Once-expTwice-expCash RichR2R2 Amplitude (0.0596) t= N= (0.1042) t= N= (0.1562) t= N= (0.1182) t= N= Duration (0.3628) t= N= (0.6336) t= N= (0.9501) t= N= (0.7179) t= N= Turnover (0.1461) t= N= (0.2552) t= N= (0.3826) t= N= (0.2896) t= N=

Dividend Uncertainty? No

Dividend Uncertainty? No and Yes

Informed Insiders? No

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

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

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

Third Time is a Charm

Or is It?

Results (Intercept) Inexperienced Once- experienced Twice- experienced RekindleR2R2 Amplitude (0.0571) t= N= (0.1069) t= N= (0.1538) t= N= (0.2312) t= N= Duration (0.4110) t= N= (0.7690) t= N= (1.1068) t= N= (1.4413) t= N= Turnover (0.1421) t= N= (0.2658) t= N= (0.3825) t= N= (0.5972) t= N=3 0.20

Conclusion Bubbles are pervasive and persistence Attempts to moderate bubbles through institutional changes do not work or exacerbate the price bubbles Bubbles depend on the underlying environment Common static environment is a necessary condition for convergence to FV Great stock market booms as driven by waves of new technology such environments introduce new sources of unpredictable yield uncertainty parallel with this development we see much new liquidity attracted into equity investment