Conclusion and Outlook

Abstract

This study explored the causes and properties of price bubbles in financial asset markets. Such price bubbles have played an increasingly important role in the recent economic literature, in line with an increasing awareness among economists of their large impact on informational and allocational market efficiency. The verdict in previous studies was mixed, with diverging opinions on the existence of bubbles in recent history, on their causes and necessary conditions for their occurrence, and on their impact on financial markets. Since the seminal work of Smith et al. (1988), bubbles have also been the focus of studies employing the experimental method. Virtually hundreds of experimental runs have been conducted, varying variables like the subject pool, the dividend structure, market mechanics, the information set, monetary incentives, and the number and kind of markets operating sequentially or simultaneously. While most such experimental tests failed to significantly reduce the bubble phenomenon, factors like the frequency of dividend distributions, the fundamental value process, and most importantly subject experience have been identified as having the potential to reduce or even reverse the direction of observed bubbles.