The underpricing of initial public offerings (IPO) is a well-documented fact of empirical equity market research. Theories explain this underpricing with market imperfections. We study three empirically relevant IPO mechanisms under almost perfect market conditions in the laboratory: a stylized book building approach, a closed book auction, and an open book auction. We report underpricing in each of these IPO mechanisms. Uncertainty about the aftermarket behavior may partly explain IPO excess returns but underpricing persists even in the repeated setting where uncertainty is negligible and despite the equilibrium adjustment dynamics, that we observe in the data. The data reveal a market-wide impact of investors’ reluctance to sell in the aftermarket at a price below the offering price. We conclude that a behavioural bias similar to the disposition effect fosters IPO underpricing in our setting.

Monetary incentives are a procedural pillar in experimental economics. By applying four distinct monetary incentive schemes in three experimental finance applications, we investigate the impact of an incentive scheme’s salience on results and elicit subjects’ perception of the experienced scheme. We find (1) no differences in results between salient schemes but a significant impact if the incentive scheme is non-salient. (2) The number of previous participations has a significant impact on the perception of the incentive scheme by subjects: it strongly correlates with subjects’ motives for participation, positively contributes to subjects’ understanding of the incentive scheme, but has no influence on subjects’ motivation within the experiment. (3) Subjects favor more salient over less- or non-salient schemes in the gain domain and negatively evaluate high salience in the loss domain.

We investigate experimentally how granting a manager stock ownership and the opportunity to trade shares of a company’s stock influence the manager’s effort and the overall behavior of the market for the company’s shares. In our design, managerial effort affects the fundamental value of the firm. Our findings suggest that endowing a manager with stock does not significantly increase the manager’s effort. When the manager is allowed to trade the company’s shares, however, she tends to accumulate additional shares, increase her effort, and raise company value. In all of our treatments, prices tend to reflect underlying fundamentals, and bubbles are rare.

In this methodological study we analyze price adjustment processes in multi-period laboratory asset markets with five distinct fundamental value (FV) regimes in a unified framework. Minimizing the effect of between-treatment variations we run markets with deterministically decreasing, constant, randomly fluctuating and—as main innovation—markets with deterministically increasing FVs. We find (i) efficient pricing in markets with constant FVs, (ii) overvaluation in markets with decreasing FVs, and (iii) undervaluation in markets with increasing FVs. (iv) Markets with randomly fluctuating fundamentals show overvaluation when FVs predominantly decline and undervaluation when FVs are mostly upward-sloping. Finally, we document that (v) bid-ask spreads and volatility of price changes are positively correlated with mispricing across regimes. The main contribution of the paper is to provide clean comparisons between distinct FV regimes, in particular between markets with increasing FVs and other regimes.

We run laboratory experiments to analyze the impact of prior investment experience on price efficiency in asset markets. Before subjects enter the asset market they gain either no, positive, or negative investment experience in an investment game. To get a comprehensive picture about the role of experience we implement two asset market designs. One is prone to inefficient pricing, exhibiting bubble and crash patterns, while the other exhibits efficient pricing. We find that (i) both, positive and negative, experience gained in the investment game lead to efficient pricing in both market settings. Further, we show that (ii) the experience effect dominates potential effects triggered by positive and negative sentiment generated by the investment game. We conjecture that experiencing changing price paths in the investment game can create a higher sensibility on changing fundamentals (through higher salience) among subjects in the subsequently run asset market.

We study the emergence of bubbles in a laboratory experiment with large groups of individuals. The realized price is the aggregation of the forecasts of a group of individuals, with positive expectations feedback through speculative demand. When prices deviate from fundamental value, a random selection of participants receives news about overvaluation. Our findings are: (i) large asset bubbles are robust in large groups, (ii) information contagion through news affects behaviour and may break the coordination on a bubble, (iii) time varying heterogeneity provides an explanation of bubble formation and crashes, and (iv) bubbles are strongly amplified by coordination on trend-extrapolation.

Expectations of future returns are pivotal for investors’ trading decisions, and are therefore an important determinant of the evolution of actual returns. Evidence from individual choice experiments with exogenously given time series of returns suggests that subjects’ return forecasts are substantially affected by how they are elicited and by the format in which subjects receive information about past asset performance. In order to understand the impact of these effects found at the individual level on market dynamics, we consider a learning to forecast experiment where prices and returns are endogenously determined and depend directly upon subjects’ forecasts. We vary both the variable (prices or returns) subjects observe and the variable (prices or returns) they have to forecast, with the same underlying data generating process for each treatment. Although there is no significant effect of the presentation format of past information, we do find that markets are significantly more unstable when subjects have to forecast returns instead of prices. Our results therefore show that the elicitation format may exacerbate, or even create, bubbles and crashes in financial markets.

Experimental asset markets with a constant fundamental value ($\mathrm{F}\mathrm{V}$) have grown in importance in recent years. A methodological examination of the robustness of experimental results in such a setting which has been shown to produce bubbles, however, is lacking. In a laboratory experiment with 280 subjects, we investigate whether specific design features are sufficient to influence experimental results. In detail, we (1) vary the visual representation of the price chart, and (2) provide subjects with full information about the FV process. We find overvaluation and bubble formation to be reduced when trading prices are displayed at the upper end of the price chart. Surprisingly, we do not find any effects when subjects have full information about the FV process.