The Bubble Game: An Experimental Study of Speculation

Authors

  • Sophie Moinas,

    1. Toulouse School of Economics (CRM-IAE-IDEI, University of Toulouse), 21 Allee de Brienne, 31000 Toulouse, France; sophie.moinas@univ-tlse1.fr
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  • Sebastien Pouget

    1. Toulouse School of Economics (CRM-IAE-IDEI, University of Toulouse), 21 Allee de Brienne, 31000 Toulouse, France; spouget@univ-tlse1.fr
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    • We would like to thank Franklin Allen, Elena Asparouhova, Andrea Attar, Snehal Banerjee, Pierpaolo Battigalli, Milo Bianchi, Bruno Biais, Peter Bossaerts, Christophe Bisière, Georgy Chabakauri, Sylvain Chassang, John Conlon, Tony Doblas-Madrid, James Dow, Xavier Gabaix, Alex Guembel, Jonathan Ingersoll, Guo Kai, Weicheng Lian, Nour Meddahi, Andrew Metrick, John F. Nash Jr., Charles Noussair, Thomas Palfrey, Alessandro Pavan, Gwenael Piaser, Luis Rayo, Jean Tirole, Reinhard Selten, Paul Woolley, Bilge Yilmaz, and especially Thomas Mariotti, as well as seminar participants in Bocconi University, Bonn University, Luxembourg University, Lyon University (GATE), Toulouse University, Paris Dauphine University, the Paris School of Economics, the London Business School, the Midwest Macroeconomics Meetings, the CSIO-IDEI workshop at Northwestern University, the Wharton School of the University of Pennsylvania, Yale University, the New York Fed, Princeton University, Caltech, University of Utah, and the 2011 PWC conference at UTS Sydney, for helpful comments. We are also very grateful to a co-editor and three anonymous referees for their suggestions that greatly improved the quality of this paper. An earlier version of this paper was circulated under the title “Rational and Irrational Bubbles: An Experiment.” Financial support from the Agence Nationale de la Recherche (ANR-09-BLAN-0358-01) is gratefully acknowledged. This research was conducted within and supported by the Paul Woolley Research Initiative on Capital Market Dysfunctionalities at IDEI-R, Toulouse.


Abstract

We propose a bubble game that involves sequential trading of an asset commonly known to be valueless. Because no trader is ever sure to be last in the market sequence, the game allows for a bubble at the Nash equilibrium when there is no cap on the maximum price. We run experiments both with and without a price cap. Structural estimation of behavioral game theory models suggests that quantal responses and analogy-based expectations are important drivers of speculation.

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