Steven Tucker

Futures Markets And Bubble Formation In Experimental Asset Markets

We construct asset markets of the type studied in Smith et al. (1988) , in which price bubbles and crashes are widely observed. In addition to a spot market, there are futures markets in operation, one maturing at the beginning of each period of the life of the asset. We find that when futures markets are present, bubbles do not occur in the spot markets. The futures markets seem to reduce the speculation and the decision errors that appear to give rise to price bubbles in experimental asset markets. Copyright 2006 Blackwell Publishing Ltd

Experimental research on asset pricing

This paper discusses some of the literature on asset market behavior. We do not intend this paper to be an exhaustive survey, but rather a review of some of the more influential results and to illustrate to the nonspecialist reader the diversity of topics that have been pursued.

Cash Inflows and Bubbles in Asset Markets with Constant Fundamental Values

Kirchler et al. (2012) make a number of contributions to experimental research on asset markets. One of their findings is that the levels of cash holdings of traders do not affect asset prices when fundamentals follow a constant time trajectory. We report a new experiment in which we replicate their findings for the specific cash levels they use. However, a new treatment is also included, in which cash holdings are at high levels early in the life of the asset. In this treatment, overpricing and market bubbles are observed, indicating that greater cash levels are indeed associated with higher prices, even when fundamental values are constant over time.

A Futures Market Reduces Bubbles But Allows Greater Profit for More Sophisticated Traders

We study the effect of the addition of a futures market, in which contracts maturing in the last period of the life of the asset can be traded. Our experiment has two treatments, one in which a spot market operates on its own, and a second treatment in which a spot and futures market are active simultaneously. We find that the futures market reduces spot market mispricing among a trader population prone to bubbles, while having no effect on pricing in a group not prone to it. Thus, overall, futures markets aid price discovery in the spot market, although the futures markets themselves exhibit considerable overpricing. Individuals with higher cognitive reflection test (CRT) scores achieve greater earnings, as they tend to sell in the overpriced futures market, while traders with lower CRT score make purchases in the futures market. We also consider the predictive power of an enhanced CRT measure (ECRT), which weights two types of incorrect answers differently .

A Collection of Surveys on Market Experiments

This paper highlights the contributions in this special issue to the very large and rapidly growing research on experimental markets. It contains ten surveys of different streams of research in this area including asset markets, contests, environmental policy, frictions, general equilibrium, labor markets, multi-unit auctions, oligopoly markets, and prediction markets.

Strategic Use of Trust

While most of the previous literature interprets trust as an action, we adopt a view that trust is represented by a belief that the other party will return a fair share. The agents action is then a commitment device that signals this belief. In this paper we propose and test a conjecture that economic agents use trust strategically. That is, the agents have incentives to inflate the perceived level of trust (the signal) in order to induce a more favorable outcome for themselves. In the experiment we study the behavior of subjects in a modified investment game which is played sequentially and simultaneously. While the sequential treatment allows for strategic use of trust, in the simultaneous treatment the first movers action is not observed and hence does not signal her belief. In line with our prediction we find that first movers send significantly more in the sequential treatment than in simultaneous. Moreover, second movers reward trusting action, but only if it is maximal. We also find that signaling with trust enhances welfare.

Comment on ‘Promises and Partnership’

Charness and Dufwenberg (2006) find that promises increase cooperation and suggest that the behavior of subjects in their experiment is driven by guilt aversion. By modifying the procedures to include a double blind social distance protocol we test an alternative explanation that promise keeping was due to external influence and reputational concerns. Our data are statistically indistinguishable from those of Charness and Dufwenberg and therefore provide strong evidence that their observed effects regarding the impact of communication are due to internal factors and not due to an outside bystander.

Laboratory experiments in economics, finance and political science

This special issue highlights the use of experiments in economics. It contains seven distinct laboratory experimental studies that explore various topics, including the importance of social context on trust and reciprocity, bargaining under great risk, collusion in hard close auctions, prices in experimental asset markets under uncertainty, the disciplining role of repeated elections, the timing of advertising under price competition and the effects of potential competition on firm pricing and entry decisions in the presence of sunk entry costs.