Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107908
Authors: 
Bosch-Rosa, Ciril
Meissner, Thomas
Bosch-Domènech, Antoni
Year of Publication: 
2015
Series/Report no.: 
SFB 649 Discussion Paper 2015-006
Abstract: 
Smith et al. (1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated by a large literature. Here we test whether the occurrence of bubbles depends on the experimental subjects' cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects' cognitive sophistication and classify them into low or high levels of cognitive sophistication. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble- crash patterns in the sessions populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects. This result lends strong support to the view that the usual bubbles and crashes in experimental asset markets are caused by subjects' confusion and, therefore, raises some doubts about the external validity of this type of experiments.
Subjects: 
Asset Market Experiment
Bubbles
Cognitive Sophistication
JEL: 
C91
D12
D84
G11
Document Type: 
Working Paper

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