Learning through passive participation in asset market bubbles

Abstract

We report a laboratory experiment that investigates the impact of pas- sive participation on bubble formation in asset markets with inexperienced and experienced traders. Some treatments employ pre-market training in which each participant is ‘matched’ with a trader from a different prior market and observes all trading details but does not directly participate in trading. We find that passive participation, similar to direct experience, significantly reduces mispricing in sub- sequent markets. This finding suggests that observation of prices is a key mecha- nism through which experience mitigates bubbles. We also vary whether transaction prices are displayed in a column of text or in a graphical display, and find that among inexperienced and once-experienced traders, markets with the tabular dis- play result in bubbles that are greater in amplitude relative to markets with the graphical display.