Chapter 32 Bubbles and Crashes in Experimental Asset Markets: Common Knowledge Failure?

In the experiment, subjects have tables at their disposal that indicate the expected future dividend stream, which corresponds to the fundamental value, at any time. Subjects take a quiz on how to read the table before the market opens. Thus the fundamental value of the asset is common knowledge at all times during the experiment. Nonetheless, a considerable fraction of total transactions take place at prices higher than the maximum possible realization of the future dividend stream. These are dominated purchases that can only be classified as errors on the part of the buyer. Furthermore, the time series of transaction prices exhibits the bubble and crash pattern, suggesting that the errors are of a type that has a role in generating bubbles in markets when resale is allowed.