The influence of investment experience on market prices: laboratory evidence
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We run laboratory experiments to analyze the impact of prior investment experience on price efficiency in asset markets. Before subjects enter the asset market they gain either no, positive, or negative investment experience in an investment game. To get a comprehensive picture about the role of experience we implement two asset market designs. One is prone to inefficient pricing, exhibiting bubble and crash patterns, while the other exhibits efficient pricing. We find that (i) both, positive and negative, experience gained in the investment game lead to efficient pricing in both market settings. Further, we show that (ii) the experience effect dominates potential effects triggered by positive and negative sentiment generated by the investment game. We conjecture that experiencing changing price paths in the investment game can create a higher sensibility on changing fundamentals (through higher salience) among subjects in the subsequently run asset market.
KeywordsExperimental finance Asset market Bubble Mispricing Information Experience
JEL ClassificationC92 D84 G10
We thank Charles Noussair (the Editor) and two referees for their very constructive and helpful comments. We thank participants of SAET 2011 and Experimental Finance 2011 for helpful comments. Financial support by the Austrian National Bank (OeNB-Grants 12789 and 14953), the Austrian Science Foundation (FWF-Grants 20609 22400, START-Grant Y617-G11), and the University of Innsbruck (Nachwuchsförderung Stöckl) is gratefully acknowledged.
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