Abstract

We present a large-group asset pricing experiment with the design of Hommes et al. (2008). Participants are asked to predict the price of a risky asset, whose realization depends on an aggregation of all individual forecasts. The asset markets consist of 21 to 32 participants, a group size larger than in most experiments. Multiple large price bubbles are observed in six out of seven markets. Individual forecast errors do not cancel out at the aggregate level and expectations cannot be called rational. Heterogeneity in expectations seems crucial to explain the market dynamics. The price patterns observed in the experiments can be captured by a heuristics switching model. Simulations with this model suggest that monetary policy may be able to deflate asset price bubbles. We propose a new experiment to study the effect of monetary policy in more detail.

Lunch will be provided for those attending the seminar.

Please contact Myrna Hennequin if you have any questions about the lecture.