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January 17, 2009

Weekend Reading 28

A lesson in human nature from Virginia Postrel.

Are Bubbles Inevitable?

Judging from the results in the far-more-predictable circumstances of lab experiments, it seems so. My new Atlantic column looks at the research: [...]

At least that's what economists would have thought before Vernon Smith, who won a 2002 Nobel Prize for developing experimental economics, first ran the test in the mid-1980s. But that's not what happens. Again and again, in experiment after experiment, the trading price runs up way above fundamental value. Then, as the 15th round nears, it crashes. The problem doesn't seem to be that participants are bored and fooling around. The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best. Besides, Noussair emphasizes, "you don't just get random noise. You get bubbles and crashes." Ninety percent of the time.

Posted by joke du jour at January 17, 2009 07:57 PM

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