Week 4 - Hussam, R. N., Porter, D., and Smith, V. L. (2008). Thar she blows: Can bubbles be rekindled with experienced subjects?

Question 1

What is the main idea of this article?

Answer 1

• They look to test whether the error elimination by market experience is robust to changes in the environment.
• (1) Mixing the participants: 70 once experienced participants reallocated to different groups for a third session so they are with random people
• (2) They increase the variance of the payout distribution (0, 1, 8, 28, 98 = avg. 27)
• (3) They increase the liquidity on the market; increased initial cash, reduced number of outstanding stock

Question 2

What is the summary of this paper?

Answer 2

-Experience alone is not a sufficient condition to ensure the elimination of price bubbles; it
eliminates bubbles only in a stationary environment.
- When important elements in the underlying market environment change for experienced
subjects, a bubble can reignite.
- An environment with high liquidity and high-dividend spread can sustain a bubble in
amplitude despite experience.
-These conditions can exist in reality: stock market booms driven by waves of new
technology (high dividend spread, high liquidity).
* New sources of unpredictable yield uncertainty (high dividend spread).
* New liquidity attracted to equity investment.
* DotCom bubble.