Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?
We report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and "error" elimination among participants in a laboratory asset market and its effect on price bubbles. Our answer to the title question is: "yes." We impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium, and this treatment rekindles a bubble. However, in replications of that same challenging environment across three experience levels, we discover that the environment yields a rare residual tendency to bubble even in the third experience session. Therefore, a caveat must be placed on the effect of twice-experienced subjects in asset markets: in order for price bubbles to be extinguished, the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters. Experience, including possible "error" elimination, is not robust to major new environment changes in determining the characteristics of a price bubble.
Hussam, Reshmaan N., David Porter, and Vernon L. Smith. "Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?" American Economic Review, 98.3 (2008): 924-37.
American Economic Association