# 15-107/II (2015-09-04)

Author(s)
Te Bao, University of Groningen, the Netherlands; Cars Hommes, University of Amsterdam, the Netherlands; Tomasz Makarewicz, University of Amsterdam, the Netherlands
Keywords:
Financial Bubbles, Experimental Finance, Rational Expectations, Learning to Forecast, Learning to Optimize
JEL codes:
C91, C92, D53, D83, D84

This experiment compares the price dynamics and bubble formation in an asset market with a price adjustment rule in three treatments where subjects (1) submit a price forecast only, (2) choose quantity to buy/sell and (3) perform both tasks. We find deviation of the market price from the fundamental price in all treatments, but to a larger degree in treatments (2) and (3). Mispricing is therefore a robust finding in markets with positive expectation feedback. Some very large, recurring bubbles arise, where the price is 3 times larger than the fundamental value, which were not seen in former experiments.