Volume 4, Number 1, 2004 Abstracts
© Copyright Erlbaum 2003

The Foundations of Experimental Economics and Applications to Behavioral Finance: The Contributions of Nobel Laureate Vernon Smith
Gunduz Caginalp-University of Pittsburgh
Kevin McCabe-George Mason University
David Porter-George Mason University

Stock Market Bubbles in the Laboratory
David P. Porter-George Mason University
Vernon L. Smith-George Mason University

Trading at prices above the fundamental value of an asset, i.e. a bubble, has been verified and replicated in laboratory asset markets for the past seven years. To date, only common group experience provides minimal conditions for common investor sentiment and trading at fundamental value. Rational expectations models do not predict the bubble and crash phenomena found in these experimental markets; such models yield only equilibrium predictions and do not articulate a dynamic process that converges to fundamental value with experience. The dynamic models proposed by Caginalp et al. do an excellent job of predicting price patterns after calibration with a previous experimental bubble, given the initial conditions for a new bubble and its controlled fundamental value. Several extensions of this basic laboratory asset market have recently been undertaken which allow for margin buying, short selling, futures contracting, limit price change rules and a host of other changes that could effect price formation in these assets markets. This paper reviews the results of 72 laboratory asset market experiments which include experimental treatments for dampening bubbles that are suggested by rational expectations theory or popular policy prescriptions.

Market Underreaction to Large Stock Price Declines: The Case of ADRs
Georgina Benou-Florida Atlantic University

This paper examines a sample of ADR stocks that experienced significant stock price declines of more than -15% during a specific month, and finds no evidence of a reversal pattern over the long run. The results are consistent with the predictions of the underreaction hypothesis and the existence of a "momentum" effect in stock prices. The underreaction hypothesis is also supported when ADRs are examined across industries, and for a sample of emerging market ADRs.

Preference for Risk in Investing as a Function of Trait Optimism and Gender
James Felton-Central Michigan University
Bryan Gibson-Central Michigan University
David M. Sanbonmatsu-University of Utah

This research examines the role of gender and optimism on the riskiness of investment choices of students (N = 66) in a semester long investment contest with both monetary and academic incentives. Data suggest that males make more risky investment choices than females, and that this difference was primarily due to the riskier choices of optimistic males. In addition, males demonstrated greater variability in final portfolio value than did females. Our results suggest that 1) the well documented gender difference in investment strategies of men and women may be due to a specific subgroup of males (i.e., optimists); 2) that optimism may lead to different behavioral tendencies in men and women depending on the domain; and 3) that the benefits of optimism may be restricted to domains in which continued effort and information seeking are likely to lead to desired outcomes.

Economic Data, Conventions, and Replication in Laboratory Asset Markets
Matthew J. Anderson-Michigan State University
Eugene R. Blue-Howard University

Data extracted from naturally occurring markets and other economic environments often suffer from problems like data confounds and intercorrelations. We report results from a series of experimental markets that suggest some of the data problems can be overcome by using experimental techniques. We use predetermined (videotaped) draws to replicate results from prior research. This is contrary to the conventional wisdom in the literature, which holds that draws should be "live." Our results suggest that the price and allocation behavior of markets can be replicated using predetermined draws to initiate trading. Furthermore, the primary strength of the experimental method-control-is maintained.

Research Elsewhere
Robert A. Olsen-Decision Research

Book Reviews
Robert A. Olsen-Decision Research