טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentYehuda Davidov Ivet
SubjectAre Bubbles Driven by Effort Gaps Between Buyers and
Sellers? Experimental Intervention in Asset
Markets
DepartmentDepartment of Industrial Engineering and Management
Supervisor Professor Eldad Yechiam
Full Thesis text - in Hebrew Full thesis text - Hebrew Version


Abstract

In 1988 Smith, Suchanek & Williams published their research which pioneered the area of asset markets with the double-auction design. They assumed that prices of experimental markets would converge to equilibrium; instead, large bubbles appeared in the markets.

Following these surprising results, Yechiam et al., (2017) argued that economic bubbles are generated by cognitive differences between sellers and buyers, so that cognitive effort gaps lead to bubble formation. They showed that the volume of selling proposals is higher than the volume of buying proposals, and that the gap between offers predicted the size of a given market bubble. They offered a psychological explanation suggesting that economic bubbles result from a conflict between the cognitive efforts allocated by sellers and buyers.

The researchers point out that such cognitive effort gap could be explained by two different psychological points of view; increased cognitive effort of buyers, leading to price declines, and increased cognitive effort of sellers, leading prices to increase. However, according to this suggestion, bubbles are created because sellers outweigh buyers in their efforts.

The current study examined the causal link between selling and buying offers' volume and over-pricing. More specifically, we explored how differences between selling and buying perspectives affect bubble formation by manipulating the volume of offers in a controlled asset market.  We hypothesized that markets where the volume of buying offers is restricted encourage formation of bubbles, as a result of higher selling efforts. On the other hand, it was hypothesized that in markets where selling offers are restricted, bubbles will diminish significantly.

The study was based on the paradigm of Smith et al. (1988). Sixty-two men and 50 women participated in 14 experimental asset markets. Each trial session consisted of two continuous double-auction trading tasks. In the first, participants could offer up to five selling offers in each round, with no limit to buying offers' volume. The second trading task had the opposite conditions. Task order was randomized.

In contrast to our hypothesis, the results did not show a significant effect for changing the restriction condition on over-pricing of the asset. These results reinforce the dominant tendency of individuals to create more selling than buying offers.

Additionally, a correlation between the gap between volume of selling and buying offers and pricing was found, showing that as the difference between offers volume increased, in favor of selling offers, asset prices increased as well, and the market tended to be more bubble-shaped. This finding is consistent with the view that pricing is driven by a conflict between two trade perspectives, with seller's perspective being more dominant.

Overall, the results demonstrated that the gap in volume offers affects assets' pricing. The conclusion that the seller's perspective is more influential at asset pricing negotiations, may be applied to various situations, at which shoppers should be informed to be more careful in making decisions, thus eliminating the relative advantage of the seller in the market.