1. Bubbles in the Laboratory
Fin254f: Spring 2010
Lecture notes 4
Readings:Porter and Smith, Stock Market Bubbles in the Laboratory

2. Outline Introduction to experimental economics
Basic market experimental designs
Summary of results on bubbles in the lab
New results "Rekindling bubbles"

3. Experimental Economics
Test economic theories in controlled laboratory environments
Begins in the 1960's
Controversial at first
Advantages
Environmental control
Disadvantages
Real world situations???

4. Vernon Smith Experimental economics pioneer
Simulates financial markets
Frequently sees bubbles
Very robust result

5. Experimental Design Baseline
15 Periods
Dividend each period
Random, known distribution
Double auction (bid/offers/order book)
Participants paid cash at end
Basic feature
Bubbles (deviation from fundamental)
Goes away with experienced traders
Many variations

6. Baseline Asset Values Porter and Smith(2004)

7. Basic Experimental Bubble Porter and Smith(2004)

8. Arizona Executives (Porter and Smith)

9. Short Sales

10. Futures Market (period 8)

11. Price Limits

12. Experimental Variations

13. Summary Bubbles present in the laboratory
Robust to many design and participant changes
Go away with experience

14. New Results (Rekindle Experiments)
Take experienced traders
Put into new experiment
Same design
Different specific parameters
Bubbles reappear
People seem to be learning something less that deep modeling parameters