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The efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates. Yet, little is known about the contribution of financial professionals to price efficiency. We run 116 experimental markets with 412 professionals and 502 students. We find that professional markets with bubble drivers – capital inflows or high initial capital supply – are susceptible to bubbles, although they are more efficient than student markets. In mixed markets with students, bubbles also occur, but professionals act as price stabilizers. We show that heterogeneous price beliefs drive overpricing, especially in bubble-prone market environments. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Traditional groups meetings are an inefficient and ineffective method for making forecasts and decisions. We compare two structured alternatives to traditional meetings: the Delphi technique and prediction markets. Delphi is relatively simple and cheap to implement and has been adopted for diverse applications in business and government since its origins in the 1950s. It can be used for nearly any forecasting, estimation, or decision making problem not barred by complexity or ignorance. While prediction markets were used more than a century ago, their popularity waned until more recent times. As a consequence there is less evidence on their validity. Prediction markets need many participants. They need clear outcomes in order to determine participants’ pay-offs. Even so, relating their knowledge to market prices is not intuitive to everyone and constructing contracts that will provide a useful forecast may not be possible for some problems. It is difficult to maintain confidentiality with markets and they are vulnerable to manipulation. Delphi is designed to reveal panelists’ knowledge and opinions via their forecasts and the reasoning they provide. This format allows testing of knowledge and learning by panelists as they refine their forecasts. Such a process does not happen explicitly in prediction markets and may not happen at all. The reasoning provided as an output of the Delphi process is likely to be reassuring to forecast users who are uncomfortable with the “black box” nature of prediction markets. We consider that, half a century after its original development, Delphi is greatly under-utilized.

The efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates. Yet, surprisingly little is known about the contribution of financial professionals to price efficiency. To close this gap, we run 86 experimental markets with 294 professionals and 384 students. We report that professional markets with bubble-drivers - capital inflows or high initial capital supply - are susceptible to bubbles, but they are significantly more efficient than student markets. In a survey with 245 professionals and students we show that cognitive skills and risk attitudes do not explain subject pool differences in bubble formation.

Financial disclosure documents provide investors with product details to facilitate informed investment decisions. We investigate whether the appearance – the visual frame – of disclosure documents impacts risk and return expectations and investment behavior. In our experiment, subjects decide about investments into real-life mutual funds. We nd that subjects expect a smaller return variance, invest more and gather less correct information if visual distractors are present in the visual frame. Results are in line with the distracted attention mechanism and suggest that disclosure policies should take the visual frame into account.