“In contrast to the commodity-flow market, summarizing for asset markets in which the item can be resold, value can depend on buyer perceptions of the expectations of others about rising or falling future values, even if such expectations are not sustainable. Smith et. al. (1998) showed that human behavior in asset-trading markets leads to dramatically different convergence results than those in commodity-flow markets, even under conditions of high transparency…
…In their experiments, assets pay dividends over many periods. In early periods, prices rise and soon exceed the expected stream of dividend payments that the asset will yield. Halfway through an experiment session, asset prices are often 50 or even 100 percent higher than expected dividend payments.
Although markets consisting of individuals who have previously been through two complete experiment sessions…so that they have had the same experience twice before….tend to finally converge, they generate substantial bubbles in the earlier sessions before trading near the fundamental rational equilibrium at the end of each session. Enigmas at first, the results were replicated with widely different groups of traders…college students, small-business owners, corporate-business executives, and over-the-counter stock traders…and by many skeptical new experimenters. However, the phenomenon is at the heart of human behavior. Twenty-five years of experimental research on asset market bubbles show that under a wide variety of treatments, asset prices typically deviate substantially from those predicted by the rational expectations market model.
Sunder (1995, p. 474) perceptively noted in his review of experimental asset markets that “lack repeat experience alone seems to be the simplest and most likely explanation of Smith, Suchanek, and Williams’ results. Few asset markets with uncertainty get close to equilibrium in less than four or five replications or trials….Since a single experimental session may have time enough for only one trial of a fifteen-period asset, several sessions are needed to impart the same level of experience…” This insight warns that the “unit of experience” in asset markets may properly be the entire episode of the bubble….an episode far longer than that which constitutes the relevant experiential feedback in a market for perishables. In the economy, of course, it can take a long time to obtain that “unit of experience.””, Steven G. Gerstad and Vernon L. Smith, “Rethinking Housing Bubbles: The Role of Household and Bank Balance Sheets in Modeling Economic Cycles”, 2014. (Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics.)
“Two points: 1) “under conditions of high transparency” asset markets are prone to bubble/bust. As I have been saying throughout this blog. The SEC and others are wrong (and have not proved their allegations in court with anyone that I am aware). Securities fraud (misleading or omitted) disclosures did not cause the housing and mortgage bubble/bust and financial crisis. Normal economic decisions in a market that is heavily distorted by well-meaning Fed monetary policies and government housing policies did. And 2) I am fascinated by this concept that commodity/perishable markets get to market equilibrium more often and faster and asset markets do not; they naturally bubble and bust. Think about the housing/bubble bust….it’s one experiment in my lifetime and I am 52!!! (It also nice to see that these top economists don’t think I should have been able to foresee the bubble/bust without any previous experience…the way the FDIC did in its bogus allegations against me.) I do think the prospective homebuyer model that I am building should help consumers make a more rational economic decision. “If we buy this home, with this mortgage, are we likely to earn a reasonable return on our invested capital or not?” No one today, even attempt to answer that question for prospective homebuyers.”, Mike Perry, former Chairman and CEO, IndyMac Bank