The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Laboratory Financial Markets

  • Daniel Friedman
Reference work entry


Small-scale financial markets have been studied in the laboratory for more than two decades. Typically, 6–20 human subjects buy and sell units of a single asset whose dividends extend over several periods and/or are uncertain. Such markets permit direct observation of informational efficiency, and allow sharp tests of theoretical predictions. They also provide test beds for policy initiatives, new market formats and automated trading strategies.


Arbitrage Asset price formation Behavioural finance Bid–ask markets Bubbles Call markets Continuous double auction Efficient markets hypothesis Equity premium Experimental economics Financial market anomalies Information aggregation Iowa Electronic Market Laboratory financial markets Learning Market institutions Posted offer Prediction markets Prospect theory South Sea bubble Stationary repetition Tulipmania 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Arthur, W.B., J.H. Holland, B. LeBaron, R. Palmer, and P. Taylor. 1997. Asset pricing under endogenous expectations in an artificial stock market. In The economy as an evolving complex system II, ed. W.B. Arthur, S.N. Durlauf, and D.A. Lane. Reading: Addison-Wesley.Google Scholar
  2. Berg, J., R. Forsythe, F. Nelson, and T. Rietz. 2008. Results from a dozen years of election futures markets research. In Handbook of experimental economics results, ed. C. Plott and V. Smith. Amsterdam: North-Holland (forthcoming).Google Scholar
  3. Bloomfield, R.J., and M. O’Hara. 1999. Market transparency: who wins and who loses? Review of Financial Studies 12: 5–35.CrossRefGoogle Scholar
  4. Blume, L., and K. Easley. 1992. Evolution and market behavior. Journal of Economic Theory 58: 9–40.CrossRefGoogle Scholar
  5. Camerer, C., and K. Weigelt. 1991. Information mirages in experimental asset markets. The Journal of Business 64: 463–493.CrossRefGoogle Scholar
  6. Coursey, D.L., and E.A. Dyl. 1990. Price limits, trading suspension, and the adjustment of prices to new information. Review of Futures Markets 9: 343–360.Google Scholar
  7. Friedman, D. 1993. How trading institutions affect financial market performance: some laboratory evidence. Economic Inquiry 31: 410–435.CrossRefGoogle Scholar
  8. Friedman, D. 1998. Monty Hall’s three doors: construction and deconstruction of a choice anomaly. American Economic Review 88: 933–946.Google Scholar
  9. Garber, P.M. 1989. Tulipmania. Journal of Political Economy 97: 535–560.CrossRefGoogle Scholar
  10. Gode, D.K., and S. Sunder. 1993. Allocative efficiency of markets with zero intelligence traders: Market as a partial substitute for individual rationality. Journal of Political Economy 101: 119–137.CrossRefGoogle Scholar
  11. Hayek, F.A. 1945. The use of knowledge in society. American Economic Review 35: 519–530.Google Scholar
  12. Holt, C.A. 1999. Y2 K bibliography of experimental economics and social science asset market experiments. Online. Available at assety2k.htm. Accessed 19 Feb 2007.
  13. James, D., and R.M. Isaac. 2000. Asset markets: how they are affected by tournament incentives for individuals. American Economic Review 90: 995–1004.CrossRefGoogle Scholar
  14. Plott, C.R., and S. Sunder. 1982. Efficiency of experimental security markets with insider information: an application of rational-expectations models. Journal of Political Economy 90: 663–698.CrossRefGoogle Scholar
  15. Smith, V.L. 1962. An experimental study of competitive market behavior. Journal of Political Economy 70: 111–137.CrossRefGoogle Scholar
  16. Smith, V.L., G.L. Suchanek, and A.W. Williams. 1988. Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica 56: 1119–1151.CrossRefGoogle Scholar
  17. Sunder, S. 1995. Experimental asset markets: a survey. In The Handbook of experimental economics, ed. J.H. Kagel and A.E. Roth. Princeton: Princeton University Press.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Daniel Friedman
    • 1
  1. 1.