Super-exponential bubbles in lab experiments: evidence for anchoring over-optimistic expectations on price

TL;DR

This paper presents laboratory evidence of super-exponential bubbles driven by traders' over-optimistic expectations, highlighting positive feedback mechanisms that cause prices to grow faster than exponential.

Contribution

It introduces calibrated models demonstrating that positive feedback from traders' expectations leads to super-exponential bubbles in controlled experiments.

Findings

Laboratory bubbles grow faster than exponential due to positive feedback.

Over-optimistic expectations are continuously upgraded based on past prices.

Positive feedback mechanisms significantly contribute to bubble formation.

Abstract

We analyze a controlled price formation experiment in the laboratory that shows evidence for bubbles. We calibrate two models that demonstrate with high statistical significance that these laboratory bubbles have a tendency to grow faster than exponential due to positive feedback. We show that the positive feedback operates by traders continuously upgrading their over-optimistic expectations of future returns based on past prices rather than on realized returns.