Do individual attitudes towards imprecision survive in experimental asset markets?

In situations where both the magnitude of gains and losses as well as the probability distribution over these realizations is uncertain, imprecision is an inherent feature of decision-making. While imprecision has been shown to affect individual valuations, many decisions are made in market settings with potentially different implications. We thus examine the impact of imprecision, first, in an individual decision task, and second, in experimental asset markets—with no imprecision (risk), imprecision in probabilities (ambiguity), imprecision in outcomes, and full imprecision. We find imprecision seeking in outcomes in people’s individual attitudes, but these preferences do not withstand market dynamics. Nevertheless, we observe imprecision aversion in probabilities at the end of trading, suggesting that ambiguity aversion, in contrast, prevails in experimental markets.

Decentralized Matching Markets of Various Sizes: Similarly Stable Solutions with High Proportions of Equal Splits

In two-sided matching markets where direct negotiations take place over the division of profits between the partners, the appropriate solution concept is the core. Only a minority of the experimentally observed bargaining results are within the core, and the number of core solutions further decreases with an increase in market complexity. For differently-sized matching markets, two adjustments to the core requirements are introduced. Projected cores from smaller markets (partial condition core) are confirmed in larger markets. The possibility of Pareto improvements from the perspective of individual players (individual condition core) does not vanish but may even increase with market size. In all the investigated experimental markets, a high percentage of equal profit splits between matching partners in face-to-face bargaining was found, especially in larger, decentralized matching markets.

Misinformation About Dividend Payouts Influences Transaction Prices in Experimental Asset Markets

AIMS: The paper investigates the effects of misinformation regarding dividend payouts on bubble formation, asset pricing and individual investment returns in experimental asset markets, when correct information about the expected dividends and their probabilities is also available.METHOD: In two experiments, totaling34 Smith-Suchanek-Williams type double-auction continuous experimental markets (238 subjects), participants were exposed to misinformation regarding dividend payouts in a previous game, with the correct dividend matrix also provided. The misinformation stated the dividends in the previous game to have been much lower or much higher than according to the expected value function. The misinformation was either homogenous for all participants or provided to only half of the investors in a market (heterogeneously).RESULTS:Homogenous misinformation stating that the last game’s dividend payouts were high, led to larger overpricing throughout the game, as compared to baseline (no misinformation) and homogenous misinformation stating that the last game’s dividends were low. In informationally heterogeneous markets, where half of the participants received “high dividends” misinformation and half remained non-misinformed, transaction prices were the lowest compared to the aforementioned treatments. It was also discovered that agents receiving the ‘high dividend’ misinformation had lower returns than non-misinformed participants in the same heterogeneous market.

Bubbles and Financial Professionals

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.