On the Bubble?
NPR's Planet Money had a great episode recently about bubbles where they referenced work by Arlington Williams. Williams actually gave students the intrinsic value of the single stock they were trading, called them insane, and posted what the price should be on the wall. The result? The price sky rocketed even further from intrinsic value.
In the lab, they set up the world's simplest stock market. There's one stock that the students can trade. At the end of every round of trading, the stock pays a small dividend — an average of $1, say. At the end of the game, the stock is worth nothing. So if there are 10 rounds left in the game, the stock should be worth $10.
They make this very simple for the students, who have computer screens that tell them exactly how much the stock should be worth. But the price of the stock still almost always shoots way up over the expected value. Then, at some point before the end of the experiment, it crashes.
One time, in the middle of a bubble, Williams pointed out the apparent insanity of what the students were doing. That made the stock price go up faster.
"Showing people that the market was in a price bubble just fueled the price bubble even more," he says.
Follow the link to listen to the program: Gold: The 4,000 Year Old Bubble