The impact of instructions and procedure on reducing confusion and bubbles in experimental asset markets

In 1988 Smith, Suchanek, and Williams (henceforth SSW) introduced a very influential model to test the efficiency of experimental asset markets. They and many subsequent studies observe that bubbles are robust to many treatment changes. Instead, bubbles are avoided only when subjects are experienced in the same setting, when the dividend-process is experienced by subjects beforehand, or when the fundamental value-process (FV) is presented in a well understandable context to reduce subjects’ confusion. We extend this line of research and show that even marginal changes in the experimental instructions/procedure can eliminate bubbles in the SSW-model. In particular, we show that mispricing is significantly reduced and overvaluation is eliminated completely (i) when the fundamental value process is displayed in a graph instead of a table or (ii) when subjects are asked about the current fundamental value at the beginning of each period. From a questionnaire conducted at the end of the experiment we infer that these treatment changes help to improve subjects’ understanding of the FV-process. We conclude that all bubble reducing factors have one common feature: they allow subjects to understand the non-intuitive declining FV-process of the SSW-model better and thus reduce subjects’ confusion about the FV-process.