Cognitive Bubbles. Ciril Bosch-Rosa 1 Thomas Meissner 1 Antoni Bosch-Domenech 2. June 1, Berlin University of Technology

Transcription

1 Cognitive Bubbles Ciril Bosch-Rosa 1 Thomas Meissner 1 Antoni Bosch-Domenech 2 1 Berlin University of Technology 2 Universitat Pompeu Fabra June 1, / 22

2 Introduction Asset Market Experiments In Smith et al. (1988) (SSW), subjects are endowed with assets and cash and are allowed to trade for 15 consecutive periods in a double auction market The characteristics of the tradeable asset are common knowledge: Assets pay a stochastic dividend in each period (iid). Distribution is common knowledge The asset has no buy-back value As Vernon Smith mentioned in a recent radio interview we thought that [the experiment] would be very simple. It would be transparent and people would trade at fundamental value, yet... 2 / 22

3 Introduction SSW (1988) 3 / 22

4 Introduction Why do we see bubbles? The result is extremely robust. The experiment has been replicated dozens of times: futures markets, parallel markets, separating by gender, mixing experienced and inexperienced subjects, showing a video before the market... all have the same pattern of bubbles. Could it be that subjects are not fully understanding the experimental environment? 4 / 22

5 Introduction Why do we see bubbles? The result is extremely robust. The experiment has been replicated dozens of times: futures markets, parallel markets, separating by gender, mixing experienced and inexperienced subjects, showing a video before the market... all have the same pattern of bubbles. Could it be that subjects are not fully understanding the experimental environment? 4 / 22

6 Introduction Why do we see bubbles? The literature seems to point towards a certain degree of misunderstanding by subjects: Bubbles persist, even when no speculation is possible (Lei et al. (2001)) In Hussam et al. (2008), bubbles can be rekindled by changing the parameters Bubble size decreases when asset is called a depletable gold mine in Kirchler et al. (2012) Higher CRT scores are associated with higher payoffs in Brabbean and Noussair (2014) and Corgnet et al. (2014) 5 / 22

7 Our Research Question Does the occurrence of bubbles in experimental asset markets depend on its participants cognitive ability? 6 / 22

8 The Design

9 Experimental Design Overview We use a two-step design: Step 1 Measure the cognitive ability of subjects Rank them from higher to lower cognitive ability Step 2 (At a later date) Invite subjects separately to asset market experiments populated by 1. High ability subjects only 2. Low ability subjects only 8 / 22

10 Experimental Design Overview We use a two-step design: Step 1 Measure the cognitive ability of subjects Rank them from higher to lower cognitive ability Step 2 (At a later date) Invite subjects separately to asset market experiments populated by 1. High ability subjects only 2. Low ability subjects only 8 / 22

11 Experimental Design Overview We use a two-step design: Step 1 Measure the cognitive ability of subjects Rank them from higher to lower cognitive ability Step 2 (At a later date) Invite subjects separately to asset market experiments populated by 1. High ability subjects only 2. Low ability subjects only 8 / 22

12 Step 1 Cognitive Ability Tests We assess the cognitive ability of a large number of subjects (N = 353) using three different tasks: 1. Cognitive Reflection Test (CRT)(Frederick 2005): Test of ability to overwrite initial intuitive response. CRT 2. Race to 60 (Gneezy et al. (2010), Levitt et al. (2011)): Test of backward induction ability Race 3. Beauty Contest (Nagel 1995): Test of strategic reasoning Beauty With the results from these tests, we create a measure of subjects cognitive sophistication. Correlations Distribution 9 / 22

13 Step 2 Asset Market Experiment For the asset market experiment, we replicate Haruvy et al. (2007): 15 periods, call market Dividends take the value of 0, 4, 14 or 30 Taler with equal probability in each period (expected dividend: 12) In every period, subjects are asked for their price expectations (incentivized) 9 subjects per market (our markets have 7) 4 repetitions (rounds) (we have 3) Endowments: 472 Taler, 1 Asset (3 subjects) 292 Taler, 2 Assets (3 subjects, we only have 1) 112 Taler, 3 Assets (3 subjects) 10 / 22

14 Step 2 Treatments We have two main treatments: 1. High Ability (9 markets) Populated by subjects from upper 30% of our measure 6 markets with common knowledge of high ability 3 markets with no common knowledge of high ability 2. Low Ability (6 Markets) Populated by subjects from lower 30% of our measure 11 / 22

15 Results

16 Results Low Ability Period Market 1 Market 2 Market 3 Market 4 Market 5 Market 6 fundamental All rounds 13 / 22

17 Results High Ability Period Market 1 Market 2 Market 3 Market 4 Market 5 Market 6 NoCo 1 NoCo 2 NoCo 3 fundamental All rounds 14 / 22

18 Results Bubble Measures Measure RAD RD PD DUR AMP Formula 1 N N t=1 Pt FVt /FV 1 N N t=1 (Pt FVt)/FV 1 N N pos t=1 max{0, (Pt FVt)/FV } max {m : P t FV t < P t+1 FV t+1 <... < P t+m FV t+m} { } { } P max t FV t P FV 1 : t = 1,..., 15 min t FV t FV 1 : t = 1,..., 15 Table: Definition of bubble measures 15 / 22

19 Results Bubble Measures (Round 1) RAD P value=0.002 RD P value=0.955 PD P value=0.002 DUR P value=0.002 AMP P value= Figure: Dots and triangles represent Low Sophistication and High Sophistication respectively. P-values were calculated by use of Mann-Whitney U-tests. All rounds 16 / 22

20 Results Beliefs Subjects were asked to state their beliefs about future prices in every period 15 predictions in period 1 14 predictions in period 2 13 predictions in period 3... For each prediction, subjects were paid separately according to how close they were to the actual price: 5 Taler if within 10% of actual price 2 Taler if within 20% of actual price 1 Taler if within 50% of actual price 17 / 22

21 Beliefs Round 1 All rounds 18 / 22

22 Summary & Discussion

23 Summary We create asset markets populated either by High or Low ability subjects Typical bubble/crash patterns with Low ability subjects No bubbles with High ability subjects Common knowledge of high ability does not seem to be necessary to prevent bubbles Asset price predictions for high ability subjects are downward sloping and follow the fundamental value Asset price predictions for low ability subjects are flat. They don t predict a fall in prices 20 / 22

24 Discussion Markets in which subjects have high ability do not bubble We are not saying that bubbles in the real world are caused by low ability participants in the market We are raising a flag about the assertion that we can observe bubbles in a controlled environment where everyone fully understands the rules and warn about the interpretation of results in complicated experimental setups (or those that we believe to be crystal clear!) 21 / 22

25 Discussion Markets in which subjects have high ability do not bubble We are not saying that bubbles in the real world are caused by low ability participants in the market We are raising a flag about the assertion that we can observe bubbles in a controlled environment where everyone fully understands the rules and warn about the interpretation of results in complicated experimental setups (or those that we believe to be crystal clear!) 21 / 22

26 Discussion Markets in which subjects have high ability do not bubble We are not saying that bubbles in the real world are caused by low ability participants in the market We are raising a flag about the assertion that we can observe bubbles in a controlled environment where everyone fully understands the rules and warn about the interpretation of results in complicated experimental setups (or those that we believe to be crystal clear!) 21 / 22

27 Discussion Markets in which subjects have high ability do not bubble We are not saying that bubbles in the real world are caused by low ability participants in the market We are raising a flag about the assertion that we can observe bubbles in a controlled environment where everyone fully understands the rules and warn about the interpretation of results in complicated experimental setups (or those that we believe to be crystal clear!) 21 / 22

28 Fin

29 Step 1 Correlations Back 1 / 10

30 Results Low Ability Back 2 / 10

31 Results High Ability Back 3 / 10

32 Beliefs Round 2 All rounds 4 / 10

33 Beliefs Round 3 All rounds 5 / 10

34 Results CRT Fraction CRTn Back 6 / 10

35 Results Race to 60 Back 7 / 10

36 Results Guessing Game Back 8 / 10

37 Results Bubble Measures Measure Treatment Round 1 Round 2 Round 3 Total mean RAD high mean RAD low pvalue < mean RD high mean RD low pvalue mean PD high mean PD low pvalue mean DUR high mean DUR low pvalue mean AMP high mean AMP low pvalue < < Back 9 / 10

38 Step 1 Our Measure Fraction Cognitive Sophistication Back 10 / 10