Paper #1464

Title:

Cognitive bubbles

Authors:

Ciril Bosch-Rosa, Thomas Meissner and Antoni Bosch-Domènech

Date:

January 2015

Abstract:

Smith et al. (1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated by a large literature. Here we test whether the occurrence of bubbles depends on the experimental subjects' cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects' cognitive sophistication and classify them into low or high levels of cognitive sophistication. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble- crash patterns in the sessions populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects. This result lends strong support to the view that the usual bubbles and crashes in experimental asset markets are caused by subjects' confusion and, therefore, raises some doubts about the external validity of this type of experiments.

Keywords:

Asset Market Experiment, Bubbles, Cognitive Sophistication.

JEL codes:

C91; D12; D84; G11.

Area of Research:

Behavioral and Experimental Economics / Microeconomics

Published in:

Experimental Economics, 2017, DOI: 10.1007/s10683-017-9529-0

Download the paper in PDF format