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Cognitive bubbles

Published online by Cambridge University Press:  14 March 2025

Ciril Bosch-Rosa ,
Thomas Meissner  and
Antoni Bosch-Domènech
Ciril Bosch-Rosa*
Affiliation:
Berlin University of Technology, Berlin, Germany Colegio Universitario de Estudios Financieros, Madrid, Spain
Thomas Meissner
Affiliation:
Maastricht University, Maastricht, The Netherlands
Antoni Bosch-Domènech
Affiliation:
Universitat Pompeu Fabra and Barcelona GSE, Barcelona, Spain
*
cirilbosch@gmail.com
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Abstract

Smith et al. (Econometrica 56(5):1119, 1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated many times. 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. 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 and crash patterns in markets populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects, indicating that cognitive sophistication of the experimental market participants has a strong impact on price efficiency.

Keywords

Asset market experimentBubblesCognitive sophistication

JEL classification

D84: Expectations • Speculations D12: Consumer Economics: Empirical Analysis G11: Portfolio Choice • Investment Decisions C91: Laboratory, Individual Behavior

Information

Type
Original Paper
Information
Experimental Economics , Volume 21 , Issue 1 , March 2018 , pp. 132 - 153
Copyright
Copyright © 2017 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-017-9529-0) contains supplementary material, which is available to authorized users.

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