Search

This thesis presents laboratory experiments to examine various aspects of bubble formation in asset markets. The experimental approach provides a controlled environment that allows for studying the interaction between individual expectations, group behavior and market outcomes. The experiments investigate the impact of group size in experimental asset markets, the efficacy of monetary policy aimed at deflating asset price bubbles, and the influence of past experiences with bubbles on future market dynamics. The goal of the thesis is to gain insight into how expectations are formed and when these expectations lead to the stabilization or destabilization of asset markets, and to explore if policy interventions can improve individual and aggregate behavior.

If you are reading this essay, chances are you are a Lone Medi-evalist. So am I. I am the only medievalist in my department (Language, Literature, and Philosophy, comprising the disci-plines of English, foreign languages, literature, linguistics, and philosophy). I teach at a historically black college, where me-dieval studies doesn’t even register on the academic radar. My historically-minded students are generally more interested in American or African history. Many students, and indeed many of my colleagues, see the Middle Ages as irrelevant to our stud-ies and disciplines.Yet my purpose here isn’t to enumerate the challenges of be-ing a Lone Medievalist. We all know what they are, and other essays in this volume examine our situation and its inherent is-sues and frustrations in detail. Instead, I intend to discuss the problem of a Lone Medievalist’s loneliness and suggest some concrete ways to deal with it.

We present a large-group experiment in which participants predict the price of an asset, whose realization depends on the aggregation of individual forecasts. The markets consist of 21 to 32 participants, a group size larger than in most experiments. Multiple large price bubbles occur in six out of seven markets. The bubbles emerge even faster than in smaller markets. Individual forecast errors do not cancel out at the aggregate level, but participants coordinate on a trend-following prediction strategy that gives rise to large bubbles. The observed price patterns can be captured by a behavioral heuristics switching model with heterogeneous expectations.