Chapter 30 Price Bubbles

This chapter reports the results of laboratory asset markets in which each trader receives an initial portfolio of cash and shares of a security with an earnings life of 15 trading periods. Each trader is free to trade shares of the security using double auction trading rules. At the end of the experiment, a sum equal to all dividends received on shares, plus initial cash plus capital gains minus capital losses is paid in U.S. currency to the trader. The baseline experiments have individual traders endowed with different initial portfolios. A common characteristic of first-period trading is that buyers tend to be those with low share endowments, while sellers are those with relatively high share endowments. This suggests that risk-averse traders might be using the market to acquire more balanced portfolios. If liquidity preference accounts for the low initial prices, which in turn lead to expectations of price increases, then making the initial trader endowments equal across subjects would tend to dampen bubbles.