Visual Representation and Observational Learning in Asset Market Bubbles

We report a laboratory experiment that investigates the impact of observational learning and visual information display on bubble formation in asset markets with inexperienced and experienced traders. We first vary whether the continuously-updated transaction prices are displayed in a column of text or in a graphical display (with time on the X-axis and price on the Y-axis). Second, to explore observational learning we employ pre-market training in which each participant is ‘matched’ with a trader from a different prior market and observes all trading details but does not participate in trading directly. We find that among inexperienced and onceexperienced traders, markets with the tabular display result in bubbles that are greater in amplitude relative to markets with the graphical display. In addition, we find that observational learning, similar to experience, significantly reduces the amplitude of bubbles in subsequent markets. The latter finding suggests that observation of prices is a key mechanism through which experience mitigates bubbles.