Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/92641
Authors: 
Hirota, Shinichi
Sunder, Shyam
Year of Publication: 
2005
Series/Report no.: 
ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 634
Abstract: 
We experimentally explore how investor decision horizons influence the formation of stock prices. We find that in long-horizon sessions, where investors collect dividends till maturity, prices converge to the fundamental levels derived from dividends through backward induction. In short-horizon sessions, where investors exit the market by receiving the price (not dividends), prices levels and paths become indeterminate and lose dividend anchors; investors tend to form their expectations of future prices by forward, not backward, induction. These laboratory results suggest that investors' short horizons and the consequent difficulty of backward induction are important contributors to the emergence of price bubbles.
Subjects: 
stock price bubbles
short-term investors
backward induction
market experiments
JEL: 
G12
C91
Document Type: 
Working Paper

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