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.
Incidentally, my dissertation is building upon this work. I'll let you know how it turns out after I corner the stock market.
(HT to Tyler)
Addendum: Where is the next bubble likely to occur? This research tells us it will likely occur where we have little experience, just as the dot com bubble occured in a new technology we had little experience with, and the real estate bubble occured after a generation of flat prices and no record of significant nation wide declines. My guess is that treasury bonds are the new bubble, since it was roughly a generation ago that they performed this well. You'd think knowledge of history would matter more, but it doesn't. Only experience.