Michailova, Julija (2010): Overconfidence and bubbles in experimental asset markets.
Download (401kB) | Preview
In this paper relationship between the market overconfidence and occurrence of the stock-prices’ bubbles is investigated. Sixty participants traded in ten experimental markets of the two types: rational and overconfident. Markets are constructed on the basis of subjects’ overconfidence, measured in the administered pre-experimental psychological test sessions. The most overconfident subjects form overconfident markets, and the least overconfident – rational markets. Empirical evidence presented in the paper refines differences between market outcomes in the experimental treatments and suggests the connection between market overconfidence and market outcomes. Prices in rational markets tend to track the fundamental asset value more accurately than prices in overconfident markets, and are significantly lower and less volatile than the average overconfident prices. Strong positive correlation between market outcomes and overconfidence measures draws conclusion, that an increase in market overconfidence is associated with the increase in average price and trading activity. Large and significant correlation between bubble measures and measures of overconfidence provide additional evidence that overconfidence has significant effect on price and trading behavior in experimental asset markets.
|Item Type:||MPRA Paper|
|Original Title:||Overconfidence and bubbles in experimental asset markets|
|Keywords:||overconfidence; price bubbles; experimental asset market.|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior
|Depositing User:||Julija Michailova|
|Date Deposited:||06. Nov 2010 12:03|
|Last Modified:||14. Feb 2013 04:33|
Allwood, C.M., Granhag, P. A., Jonsson, A. C., (2006), Child witnesses’ metamemory realism. Scandinavian Journal of Psychology, Vol. 47(6), p 461-447.
Alpert, M., Raiffa, H., (1982), A progress report on the training of probability assessors. In Kahneman, D., Slovic, P., Tversky, A. (Eds.), Judgment under Uncertainty: Heuristics and Biases, Cambridge University Press, p. 294-305.
Barber, B., and T. Odean, (2001), Boys Will Be Boys: Gender, Overconfidence and Common Stocks Investments. Quarterly Journal of Economics, 116, p. 261-292.
Bar-Hillel, M., (2001), Subjective Probability Judgments. In Smelser, N.J. and Baltes, D.B. (Eds.) “International Encyclopedia of the Social and Behavioral Sciences”, Amsterdam: Elsevier Science Ltd., p. 15247-15251.
Baron, R. A., (2000), Psychological Perspectives on Entrepreneurship: Cognitive and Social Factors in Entrepreneurs’ Success. Current Directions in Psychological Science, Vol. 9(1), p. 15-18.
Benos, A., (1998), Aggressiveness and Survival of Overconfident Traders. Journal of Financial Markets, Vol. 1, p. 353-383.
Biais, B., Hilton, D., Mazurier, K., Pouget, S., (2005), Judgmental overconfidence, self-monitoring and trading performance in an experimental financial market. Review of economic studies, Vol. 72(2), p. 287-312.
Caballé, J. and Sákovics J., (2003), Speculating Against an Overconfident Market. Journal of Financial Markets Vol. 6, p. 199-225.
Cambridge, R. M., Shreckengost, R. C., (1978), Are you sure? The subjective probability assessment test. Langley, VA: Office of Training, Central Intelligence Agency.
Clarke, F. R., (1960), Confidence Ratings, Second-Choice Responses, and Confusion Matrices in Intelligibility Tests. Journal of the Acoustical Society of America, Vol. 32(1), p. 35-46.
Cohen, J., (1988), Statistical Power Analysis for the Behavioural Sciences (2nd ed.). New Jersey: Lawrence Erlbaum, 567 p.
Daniel, K., Hirshleifer D., Subrahmanyam A., (1998), Investor Psychology and Security Market Under-And Overreactions. Journal of Finance, Vol. 53(6), p 1839-1885.
Deaves, R., Lüders, E., Luo, G. Y., (2009), An Experimental Test of the Impact of Overconfidence and Gender on Trading activity. Review of finance, Vol. 13(3), p. 555–575.
De Bondt, W. F. M., Thaler R., (1984), Does the Stock Market Overreact? The Journal of Finance, Vol. 40(3), p. 793-805.
De Long, J. B., Shleifer, A., Summers, L. H., Waldmann, R. J., (1991), The Survival of Noise Traders in Financial Markets. The Journal of Business, Vol. 64(1), p. 1-19.
Dufwenberg, M., Lindqvist, T., Moore, E., (2005), Bubbles and Experience: An Experiment, The American Economic Review, Vol. 95(5), p. 1731-1737.
Fischbacher, U., (2007), z-Tree: Zurich Toolbox for Ready-made Economic Experiments. Experimental Economics, Vol. 10(2), p. 171-178.
Fischhoff, B., Slovic, P., Lichtenstein, S., (1977), Knowing with certainty: the appropriateness of extreme confidence. Journal of Experimental Psychology: Human Perception and Performance, Vol. 3, p. 552-564.
Fraser, S., Greene, F. J., (2006), The Effects Of Experience On Entrepreneurial Optimism And Uncertainty, Economica, Vol. 73(290), p 169-192.
Gervais, S., Odean, T., (2001), Learning to be Overconfident. Review of Financial Studies, Oxford University Press for Society for Financial Studies, Vol. 14(1), p. 1-27.
Glaser, M., Weber, M., (2007), Overconfidence and trading volume. The Geneva Risk and Insurance Review, Vol. 32(1), p. 1-36.
Griffin. D, Brenner, L., (2005). Perspectives on Probability Judgment Calibration. In Koehler, D. J., Harvey, N. (Eds.) “Blackwell Handbook of Judgment and Decision Making”, p. 177-199.
Haruvy, E., Lahav, Y., Noussair, Ch., (2007), Traders’ Expectations in Asset Market: Experimental Evidence. Working Paper.
Hazard, T. H., Peterson, C. R., (1973), Odds versus probabilities for categorical events. Tech. Rep. No. 73-2, McLean, VA: Decisions and Designs, Inc.
Hirshleifer D., Subrahmanyam, A., Titman S., (1994 ), Security Analysis and Trading Patterns When Some Investors Receive Information Before Others. Journal of Finance, Vol. 49(5), p. 1665-1698.
Hvide, H. K., (2002), Pragmatic Beliefs and Overconfidence. Journal of Economic Behavior and Organization, Elsevier, Vol. 48(1), p. 15-28.
Hynes, M., Vanmarcke, E., (1976), Reliability of embankment performance predictions. Proceedings of the ASCE Engineering Mechanics Division Specialty Conference, Waterloo, Ontario, Canada: University of Waterloo Press.
Kim, A. K., Nofsinger, J. R., (2003), The Behavior and Performance of Individual Investors In Japan. Working paper.
Kirchler, E., Maciejovsky, B., (2002), Simultaneous Over- and Underconfidence: Evidence from Experimental Asset Markets. Journal of Risk and Uncertainty, Springer, Vol. 25(1), p. 65-85.
Koriat A, Lichtenstein S, Fischhoff B., (1980), Reasons for Confidence. Journal of Experimental Psychology: Human Learning and Memory, Vol. 6, p. 107-18.
Lakonishok, J., Shleifer, A., Vishny, R. W., (1992), The Impact of Institutional Trading on Stock Prices. Journal of Financial Economics, Elsevier, Vol. 32(1), p. 23-43.
Lei, V., Noussair, Ch. N., Plott, Ch. P, (2001), Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality. Econometrica, Vol. 69(4), p. 831-859.
Lichtenstein, S., and Fischhoff, B, (1980), Training for Calibration. Organizational Behavior and Human Performance, Vol. 26, p. 149-171.
Lichtenstein, S., Fischhoff, B., Phillips, L. D., (1977), Calibration of Probabilities: The State of the Art. In Jungermann, H., deZeeuw, G. (Eds.) “Decision Making and Change in Human Affairs”, Amsterdam: D. Reidel.
Lichtenstein, S., Fischhoff, B., Phillips, L. D., (1982), Calibration of Probabilities: The State of the Art to 1980. In Kahneman, D., Slovic, P., Tversky, A. (Eds.) “Judgment under Uncertainty: Heuristics and Biases”, Cambridge: Cambridge University Press, p. 306-334.
Milgrom, R., Stokey N., (1982), Information, Trade and Common Knowledge. Journal of Economic Theory, Vol. 26(1), p. 17-27.
Menkhoff, L., Schmidt, U., Brozynski, T., (2006), The Impact of Experience on Risk Taking, Overconfidence, and Herding of Fund Managers: Complementary Survey Evidence. European Economic Review, Vol. 50(7), p. 1753-1766.
Moore, P. G., (1977), The manager’s struggle with uncertainty. Journal of the Royal Statistical Society, Vol. 140, p. 129-165.
Neale, M. A., Bazerman, M. H., (1990), Cognition and rationality in negotiation. New York: The Free Press, p. 240.
Noussair, Ch., Tucker, S., (2006), Futures Markets and Bubble Formation in Experimental Asset Markets. Pacific Economic Review, Vol. 11(2), p. 167–184.
Odean, T., (1998), Volume, Volatility, Price and Profit When All Traders are Above Average. Journal of Finance, Vol. 53(6), p. 1887 -1934.
Odean, T., (1999), Do Investors Trade Too Much? American Economic Review, Vol. 89(5), p. 1278-1298.
Oskamp, S., (1962), The relationship of clinical experience and training methods to several criteria of clinical prediction. Psychological Monographs, Vol. 76(547), p. 1-28.
Pitz, G.F., (1974), Subjective probability distributions for imperfectly known quantities. In Gregg, L. W. (Ed.), Knowledge and Cognition. New York: Wiley, p. 29-41.
Powel, W. D., Bolich, C., (1993), Changing predictions based on knowledge of past performance in preschool and young grades-school. Child Study Journal, Vol. 23(3), p. 209.
Porter, D., Smith, V., (1995), Futures Contracting and Dividend Uncertainty in Experimental Asset Markets. Journal of Business, Vol. 68, p. 509–541.
Russo, J. E., Schoemaker, P. J. H., (1992), Managing Overconfidence. Sloan Management Review, Vol. 33, p.7-17.
Scheinkman, J. A., Xiong, W., (2003), Overconfidence and Speculative Bubbles. Journal of Political Economy, Vol. 111, p. 1183-1219.
Shiller, R. J., (2000), Irrational Exuberance. Princeton, N.J.: Princeton Univ. Press, 344 p.
Sieber, J. E., (1974), Effects of Decision Importance on Ability to Generate Warranted Subjective Uncertainty. Journal of Personality and Social Psychology, Vol. 30, p. 688-694.
Smith, V. L., Suchanek G. L., Williams A. W., (1988), Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets. Econometrica, Vol. 56(5), p. 1119-1151.
Smith, V. L., (1994), Economics in the Laboratory. Journal of Economic Perspectives, American Economic Association, Vol. 8(1), p. 113-31.
Staël von Holstein, C. A. S., (1972), Probabilistic forecasting: An experiment related to the stock market. Organizational Behavior and Human Performance, Vol. 8, p. 139-158.
Statman, M., Thorley, S., Vorkink, K., (2006), Investor Overconfidence and Trading Volume. Review of Financial Studies, Vol. 19, p. 1531–1565.
Tversky, A., Kahneman, D, (1982), Judgment under Uncertainty: Heuristics and Biases. In Kahneman, D., Slovic, P., Tversky, A. (Eds.), Judgment under Uncertainty: Heuristics and Biases, Cambridge University Press, p. 3-20.
Van Boening, M., Williams A., LaMaster, S., (1993), Price Bubbles and Crashes in Experimental Call Markets. Economics Letters, Vol. 41, p. 179–185.
Wagenaar, W. A., Keren, G., (1986), Does the expert know? The reliability of predictions and confidence ratings of experts. In E. Hollnagel, G. Maneini, and D. D. Woods (Eds.), Intelligent decision support in process environments, Berlin: Springer, p. 87-107.
Weinstein, N. D., (1980), Unrealistic Optimism about Future Life Events. Journal of Personality and Social Psychology, Vol. 39, p. 806-820.
White, E. N., (2006), Bubbles and Busts: The 1990s in the Mirror of the 1920s. NBER Working paper Nr. W12138.
Zakay, D., Glicksohn, J., (1992), Overconfidence in a multiple-choice test and its relationship to achievement. Psychological Record, Vol. 42(4), p 519-524.
Available Versions of this Item
- Overconfidence and bubbles in experimental asset markets. (deposited 06. Nov 2010 12:03) [Currently Displayed]