Bubbles in asset markets and the heterogeneity of beliefs

Abstract

We examine the relationship between belief heterogeneity and transaction volume in asset markets. In a laboratory experiment, we elicit long-term beliefs from traders about future prices and make different subsets of the belief information common knowledge, depending on the treatment. There is a strong tendency for traders to adjust their beliefs toward the median belief in their market. There is no effect of making belief information public on transaction volume. Surprisingly to us, however, making the median price prediction for the entire future time horizon common knowledge greatly reduces mispricing