Date of Award

2023

Degree Type

Restricted to Claremont Colleges Dissertation

Degree Name

Economics, PhD

Program

School of Social Science, Politics, and Evaluation

Advisor/Supervisor/Committee Chair

Mónica Capra

Dissertation or Thesis Committee Member

Joshua Tasoff

Dissertation or Thesis Committee Member

Pierangelo De Pace

Terms of Use & License Information

Creative Commons Attribution-Noncommercial 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 4.0 License.

Rights Information

© 2023 Taeksang Jung

Keywords

Belief elicitation, Bubbles, Cognitive sophistication, Experimental asset market, Information

Subject Categories

Economics

Abstract

Chapter 1: We review the literature on experimental bubble asset markets of Smith et al., 1988 focusing on the role of beliefs and cognitive sophistication of subjects. The authors informed the structure of asset dividend payments to all subjects; however, bubble and crash price patterns with active transactions are found in the markets. The bubbles are found robustly in the market. Many studies have tried to explain and eliminate the bubbles in the experimental asset market. One of the most powerful ways to eliminate the bubble is for subjects to gain experience in repeated markets with the same cohorts. It decreases a lack of common knowledge of the rationality of other traders, and subjects have common expectations. It results in the convergence of forecasts and prices to the fundamental values. Another factor we focus on is the cognitive sophistication of subjects. When misunderstanding and confusion about the market and the fundamental values are resolved, market prices converge to the fundamental values. There is an increasing volume of studies testing the role of the cognitive sophistication of subjects on market behaviors. The studies provide in-depth explanations for behaviors in the market.

Chapter 2: We test the effects of belief elicitation methods on belief reporting and market behaviors in the experimental bubble asset market. Two belief elicitation methods not frequently applied in the literature are compared: The binarized scoring rule (BSR) and introspection with fixed compensation. BSR is a proper scoring rule, but it is complicated for most subjects to understand its mechanism. Introspection asks subjects to report their beliefs voluntarily. For the comparison, a fixed amount of monetary compensation is provided for introspection. The size of monetary rewards for reporting beliefs is designed to be small and the same for the two methods. The comparison shows if a complicated and theoretically supported belief elicitation method improves the accuracy of forecasts compared to introspection with fixed compensation when their rewards are small. BSR does not have more benefits than introspection with a fixed compensation. It does not decrease the proportion of extremely valued forecasts and the proportion of orders inconsistent with forecasts. Instead, greater forecast errors on average are found in the BSR group when market prices are considered together. When comparing forecast errors and earned forecast rewards of subjects with a high cognitive sophistication index, there are no significant differences between the two groups. However, the differences are large and significant for subjects with a low cognitive sophistication index. It implies that a complicated belief elicitation method may negatively affect the forecast accuracy of subjects with low cognitive sophistication.

Chapter 3: We examine the effects of providing expected final earning (EFE) information to subjects on the behaviors in the experimental bubble asset market. The information shows how much experimental cash a subject is expected to have at the end of the market. We conjecture that the information leads subjects to make trade decisions considering long-term outcomes, and market prices will converge to the fundamental asset values. Bubble measures for overpricing and mispricing are smaller on average in the EFE treatment group. However, the information does not reduce the effects of short-term forecasts on trade behaviors or the proportion of myopic trades. Instead, the proportion of feedback trades, which are trades following past price trends, is significantly low in the EFE treatment group. The relationship holds for subjects with low cognitive sophistication. In addition, subjects increase their bid prices less when observing a decrease in one’s EFE in the previous period. The result is in line with predictions of myopic loss aversion. By receiving evaluation feedback more frequently, subjects make trade decisions, taking lower risks. We suggest that it is one of the reasons for the smaller bubbles in the EFE group. EFE information does not reduce myopic trade decisions, but it improves subjects’ trade decisions in the context of the experimental bubble asset market.

ISBN

9798381961249

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