In an experimental setting, we study the role of emotions in markets. Our experimental market is modeled on those of Smith, Suchanek, and Williams (1988) and Caginalp, Porter, and Smith (2001). Participants take part in a laboratory market in which they trade a risky asset over a computer network. Prior to trading, they watch short videos that are exciting and upbeat—chase scenes; neutral—segments from a historical documentary; fearful—scenes from a horror movie; or sad—scenes from a drama. Larger asset pricing bubbles develop in experimental markets run subsequent to the exciting videos relative to the other three conditions. The differences in the magnitude and amplitude of the bubbles are both economic and statistically significant. A follow-up study indicates that the phenomenon may be explained by excited people’s greater inclination to extrapolate past positive market trends into future asset prices.
July 3, 2012
2012 Working Papers