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Overconfidence and bubbles in experimental asset markets

Michailova, Julija and Schmidt, Ulrich (2011): Overconfidence and bubbles in experimental asset markets. Forthcoming in: Journal of Behavioral Finance

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This paper investigates the relationship between market overconfidence and occurrence of stock-price bubbles. Sixty participants traded stocks in ten experimental asset markets. Markets were constructed on the basis of subjects’ overconfidence: The most overconfident subjects form high overconfidence markets, and the least overconfident subjects low overconfidence markets. Prices in low overconfidence markets tend to track the fundamental asset value more accurately than prices in high overconfidence markets and are significantly lower and less volatile. Additionally we observe significantly higher bubble measures and trading volume in high overconfidence markets. Two possible explanations for these differences are analyzed: While price expectations are significantly higher in high overconfidence markets no differences in the average degree of risk aversion were detected.

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