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Thar She Blows: Rekindling Bubbles
Outline of Presentation
Standard Results from 20 Years of Bubble Experiments
Environmental Influences on Bubble Characteristics
Experimental Design Results Conclusions
Overview of the Experimental Environment The basic experimental set-up has the
following features 15 period asset Dividend uncertainty
{0,8,28,60} Initial cash and shares Double Auction or Call market trading
mechanism Trader experience
Fundamental Value Line
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Period 1: 24 x 15 =360
Fundamental Value Line
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
360 - 24 =336 for Period 2
Fundamental Value Line
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Fundamental Value Line
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperience Traders Time Series
7
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
7 9
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
7 912
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
7 912
11
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
8
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813 9
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813 9
7
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813 9
7
5
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
67 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 85
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
7
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
3
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
33
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
233
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
3
233
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
3
233
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
4
2
3
233
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
1
4
2
3
233
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
21
4
2
3
233
8
67
5
5
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
811
1297
4
6
6
5
7
9138
8
6
5
5
7 6
8
3 3 2
3
2
4
11
2
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
3
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34 3
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34 3
1
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34 3
1
1
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34 3
1
1
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34 3
1
1 2
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34 3
1
1 2
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
Inexperience Traders Time Series
6
8
813 9
7
5
6
6
4
7 912
11 8
2
11
4
2
3
233
8
67
5
5
4
34 3
1
1 2
1
2
11
2 10
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
Pri
ce in
Ce
nts
Fundamental Value
Inexperienced
O nce-Experienced
Twice-Experienced
A Different View
Deviation from Fundamental Value
-400
-300
-200
-100
0
100
200
300
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Period
Pri
ce -
FV
Inexperienced
A Different View
Deviation from Fundamental Value
-400
-300
-200
-100
0
100
200
300
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Period
Pri
ce -
FV
Inexperienced
Once Experienced
A Different View
Deviation from Fundamental Value
-400
-300
-200
-100
0
100
200
300
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Period
Pri
ce -
FV
Inexperienced
Once Experienced
Tw ice Experienced
Bubble Characteristics
Amplitude: measures trough-to-peak change in asset value relative to fundamental value
}15,...,1:{}15,...,1:{
tE
fPMint
E
fPMax tttt
Bubble Characteristics
Amplitude: measures trough-to-peak change in asset value relative to fundamental value
Duration: measures the length, in periods, of increases in prices relative to fundamental value
}15,...,1:{}15,...,1:{
tE
fPMint
E
fPMax tttt
}.....:{ 11 mtmttttt fPfPfPmMax
Bubble Characteristics
Amplitude: measures trough-to-peak change in asset value relative to fundamental value
Duration: measures the length, in periods, of increases in prices relative to fundamental value
Turnover: measures market trading activity
}15,...,1:{}15,...,1:{
tE
fPMint
E
fPMax tttt
}.....:{ 11 mtmttttt fPfPfPmMax
S
Vt
t
Estimates of Bubble Characteristics
Amplitudei = Intercept + β1 Once-experiencedi + β2 Twice-experiencedi
Durationi = Intercept + β1 Once-experiencedi + β2 Twice-experiencedi
Turnoveri = Intercept + β1 Once-experiencedi + β2 Twice-experiencedi
Results
(Intercept)Inexperienced
Once-experienced Twice-experienced
R2
Amplitude 1.2576(0.0643)t=19.5686N=40
-0.4100(0.1122)t=-3.6527N=21
-1.1690(0.1683)t=-6.9466N=8
0.45
Duration 9.9024(0.3967)t=24.9613N=40
-3.3524(0.6928)t=-4.8388N=21
-7.0453(1.0388)t=-6.7819N=8
0.47
Turnover 3.0282(0.1591)t=19.0387N=40
-0.6448(0.2778)t=-2.3213N=21
-1.7482(0.4165)t=-4.1973N=8
0.27
What Has an Effect on the Bubbles?
Trader Background? No
Period
Pric
e i
n C
en
ts
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
8
8
7
2
3
7
3
4
6
25
8
138
9
Figure 6. Mean Contract Price and Volume, Arizona Executives
Short-Selling? No
Period
Pri
ce
in
Ce
nts
0
50
100
150
200
250
300
350
400
450
500
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
11
7 9 3 5
4
1
3
1 1
7 8
10 9
7
[0] [2]
[-1] [3]
[0]
[-1]
[-1] [3] [1] [-2]
[-2]
[1]
[-3]
[1] [0]
[.] Net Short Sales
Liquidity?
Liquidity (Cash/Share_Value)
-200
-100
0
100
200
300
400
500
0 5 10 15
Period
Pri
ce -
FV
L=0.5
Liquidity? Yes
Liquidity (Cash/Share_Value)
-200
-100
0
100
200
300
400
500
0 5 10 15
Period
Pri
ce -
FV
L=0.5
L=0.75
Liquidity? Yes
Liquidity (Cash/Share_Value)
-200
-100
0
100
200
300
400
500
0 5 10 15
Period
Pri
ce
- F
V
L=0.5
L=0.75
L=1
Results
(Intercept)Inexperienced
Once-exp Twice-exp Cash Rich R2
Amplitude 1.2576(0.0596)t=21.0833N=40
-0.4100(0.1042)t=-3.9354N=21
-1.1690(0.1562)t=-7.4843N=8
0.3559(0.1182)t=3.0103N=14
0.53
Duration 9.9024(0.3628)t=27.2940N=40
-3.3524(0.6336)t=-5.2910N=21
-7.0453(0.9501)t=-7.4157N=8
1.7653(0.7179)t=-2.4549N=14
0.56
Turnover 3.0282(0.1461)t=20.7251N=40
-0.6448(0.2552)t=-2.5269N=21
-1.7482(0.3826)t=-4.5691N=8
1.0221(0.2896)t=3.5294N=14
0.32
Dividend Uncertainty? No
Dividend Certainty
-150-100
-500
50100150200250
Period
Pri
ce -
FV
Inexperienced
Dividend Uncertainty? No and Yes
Dividend Certainty
-150-100-50
050
100150200250
Period
Pri
ce -
FV
InexperiencedOnce Exp
Informed Insiders? No
Period
Pri
ce
in
Ce
nts
0
50
100
150
200
250
300
350
400
450
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
23
3 33 2
2 4
4
62
3
6 2
[4][0]
[-1]
[-4] [-1] [-1][-1]
[0] [-2][0] [-1]
[-1] [-1]
[1]
[.] Net Purchases byInsiders
Cohort Experience Seems To Do It
Experience with same faces and same environment causes convergence to FV
Cash exacerbates the bubble characteristics Dividend certainty speeds-up the process
Experimental Design
Dividends {0,8,28,60}
Initial Portfolios Average Portfolio is
4 shares and 720 cents in cash
Twice Experienced Same cohort
Dividends {0,1,8,28,98}
Initial Portfolios Average Portfolio is
2 shares and 1530 cents in cash
Twice Experienced Mixed traders
Lead-up (Inexp, 1-Exper)
Replication with baseline Same cohort (5 cohorts – 70 subjects)
through 2 experiments with baseline parameters
Third time back Mixed the cohorts Changed the environment parameters
Third Time is a Charm
Deviation from Expected Dividend ValueTwice-Experienced Subjects
-400
-300
-200
-100
0
100
200
300
400
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5
Period
(Pri
ce
- F
un
da
me
nta
l Va
lue
)
Third Time is a Charm
Deviation from Expected Dividend ValueTwice-Experienced Subjects
-400
-300
-200
-100
0
100
200
300
400
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5
Period
(Pri
ce
- F
un
da
me
nta
l V
alu
e)
Or is It?
Deviation from Expected Dividend ValueTwice-Experienced Subjects
-400
-300
-200
-100
0
100
200
300
400
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5
Period
(Ac
tua
l Va
lue
- F
un
da
me
nta
l V
alu
e)
Or is It?
Deviation from Expected Dividend ValueTwice-Experienced Subjects
-300
-200
-100
0
100
200
300
400
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5
Period
(Pri
ce
- F
un
da
me
nta
l Va
lue
)
Or is It?
Deviation from Expected Dividend ValueTwice-Experienced Subjects
-300
-200
-100
0
100
200
300
400
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5
Period
(Ac
tua
l Va
lue
- F
un
da
me
nta
l
Va
lue
)
Results
(Intercept)Inexperienced
Once-experienced
Twice-experienced
Rekindle R2
Amplitude 1.2576(0.0571)t=22.0245N=40
-0.4100(0.1069)t=-3.8353N=21
-1.1690(0.1538)t=-7.6007N=8
-0.0947(0.2312)t=-0.4094N=3
0.49
Duration 9.9024(0.4110)t=24.0934N=40
-3.3524(0.7690)t=-4.3594N=21
-7.0453(1.1068)t=-6.3654N=8
-4.8627(1.4413)t=-3.3739N=3
0.57
Turnover 3.0282(0.1421)t=21.3103N=40
-0.6448(0.2658)t=-2.4258N=21
-1.7482(0.3825)t=-4.5704N=8
-0.7581(0.5972)t=-1.2723N=3
0.20
Conclusion
Bubbles are pervasive and persistence Attempts to moderate bubbles through institutional
changes do not work or exacerbate the price bubbles Bubbles depend on the underlying environment
Common static environment is a necessary condition for convergence to FV
Great stock market booms as driven by waves of new technology
such environments introduce new sources of unpredictable yield uncertainty
parallel with this development we see much new liquidity attracted into equity investment
