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  • June 2008
  • Article
  • American Economic Review

'Thar' She Blows: Can Bubbles Be Rekindled with Experienced Subjects?

By: Reshmaan Hussam, David Porter and Vernon Smith
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Abstract

We report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and “error” elimination among participants in a laboratory asset market and its effect on price bubbles. Our answer to the title question is: “yes.” We impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium, and this treatment rekindles a bubble. However, in replications of that same challenging environment across three experience levels, we discover that the environment yields a rare residual tendency to bubble even in the third experience session. Therefore, a caveat must be placed on the effect of twice-experienced subjects in asset markets: in order for price bubbles to be extinguished, the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters. Experience, including possible “error” elimination, is not robust to major new environment changes in determining the characteristics of a price bubble.

Keywords

Experimental Economics; Asset Markets; Bubbles; Price Bubble; Financial Markets

Citation

Hussam, Reshmaan, David Porter, and Vernon Smith. "'Thar' She Blows: Can Bubbles Be Rekindled with Experienced Subjects?" American Economic Review 98, no. 3 (June 2008): 924–937.
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About The Author

Reshmaan N. Hussam

Business, Government and the International Economy
→More Publications

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  • Bangladesh: Into the Maelstrom By: Reshmaan Hussam, Sophus A. Reinert and Jaya Y. Wen
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