Interaction between price and expectations in the jar-guessing experimental market

Abstract

AbstractThis study evaluates the interdependence between pricing and expectations. We investigated not only the ways in which traders’ thoughts determined asset prices, but also the feedback process from prices to expectations. In our laboratory market, subjects were asked to estimate the number of balls in a jar and trade an asset whose value was equal to that number. Our asset market, where transactions were eventually settled at the asset value, was like futures markets. The subjects alternately repeated the process of guessing and transaction. A double-auction was used to design our market. Our findings indicated a downward bias in the subjects’ estimates, which led to lower transaction prices, since the price converged to the equilibrium price that was determined by the median of estimates. The subjects’ experience in our laboratory markets had no systematic effect on the accuracy of estimates, but made them less heterogenous. Our subjects were apt to revise their estimates with reference to prices in a market. We examined the estimation revision process of the subjects using the partial adjustment model.