Publication: The effect of earned vs. house money on price bubble formation in experimental asset markets
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2013-02
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Abstract
Can “house money” explain asset market bubbles? We test this hypothesis in an asset
experiment with a certain dividend
cash and shares is given to subjects
initial portfolios are constructed using subject
that bubbles still occur; however trading volumes are significantly abated and the dispersion
of earnings is significantly lower when subjects earn their starting endowments. We
investigate the role of cognitive ability in accounting for the differences in earnings
distribution across treatments by using the Cognitive Reflection Test (CRT). We find that
high CRT subjects earned more money on average than the initial value of their portfolio
while low CRT subjects earned less. Subjects with low CRT scores were net purchasers
(sellers) of shares when the price was above (below) fundamental value while the opposite
was true for subjects with high CRT scores.