Media Briefings

ASSET PRICES BUBBLES: Evidence from an experimental market of the roles of confusion and strategic uncertainty

  • Published Date: October 2017

Uncertainty about the potentially non-rational behaviour of other people plays as important a role as confusion in generating asset prices bubbles. That is one of the conclusions of experimental research by Eizo Akiyama, Nobuyuki Hanaki and Ryuichiro Ishikawa, published in the October 2017 issue of the Economic Journal.

Their study also finds that participants who are less confused are more sensitive to the presence of the strategic uncertainty that is present in experimental markets where participants are all potentially non-rational human traders, rather than all but one being computer traders, whose behaviour is completely predictable.

Why do we see asset price bubbles in real markets? Researchers in experimental finance have investigated this question for more than 25 years. The new study contributes to this body of research by distinguishing between two possible reasons: confusion and strategic uncertainty.

Experimental asset markets are a methodological innovation in economics. In this experimental paradigm, non-experts with no particular background in economics gather in an economics laboratory and play various hypothetical and computerised asset-trading games. They can receive monetary prizes depending on their performance in these games.

Many such experiments are conducted in situations where standard economic theory based on rational traders would predict that it is not possible for price bubbles to happen. But since the pioneering work of Vernon Smith (economics Nobel laureate in 2002) and his colleagues, it is well known that bubbles can and do happen in such environments.

Puzzled by this, recent studies have tried to understand the bubbles by positing the ‘confusion’ of non-rational participants. The new study sheds light on a different aspect of this phenomenon: strategic uncertainty – that is, the uncertainty caused by the (non-rational) behaviour of other people.

The researchers’ approach is based on the fact that even ‘rational’ people may not behave as the standard theory predicts when they doubt the rationality of others. In other words, when other people trade in irrational ways, a rational actor should incorporate such strategic uncertainty into making good decisions. The challenge is determining how to separate the effects caused by confusion from those caused by strategic uncertainty, and then to quantify each of them.

The researchers overcome this challenge by asking the participants in their experiments to predict future market prices in two types of experimental asset markets, One market consisted of six human traders (6H), while the other consisted of one human and five computer traders (1H5C).

The participants in the experiments were informed about the nature of the other traders in the market in which they were participating. While those in the 6H market knew that there were five other human participants in the market, those in the 1H5C market knew that the other five traders were computers and that no other human participants were present in their market. Furthermore, the participants in the 1H5C market knew that all five computer traders submitted the same orders at the fundamental value of the asset in each period.

The fact that the participants were perfectly informed about the behaviour of the other traders (that is, the computers) in the 1H5C market meant that the effects of strategic uncertainty were eliminated, as rational participants in 1H5C should predict that prices would follow the fundamental value in each period. Therefore, if there were any deviations from such price forecasts, it would necessarily be a result of the participants’ confusion.

In 6H, in contrast, the participants’ price forecasts could deviate from fundamental value because of either confusion or strategic uncertainty. By determining the difference between the two markets, it is possible to separate the effects of confusion from those of strategic uncertainty.

The researchers find that both confusion and strategic uncertainty are equally important in their experiments. Thus, it is not just confusion that caused the price bubbles in previous experiments but strategic uncertainty as well.

Furthermore, while the participants’ scores on the Cognitive Reflection Test (CRT, which measures their tendency to override impulsive and non-reflected responses) were negatively correlated with the measured effects of confusion, there was no such correlation between the CRT scores and the total effect of confusion and strategic uncertainty. This means that those who are less confused are more sensitive to the presence of the strategic uncertainty that is present in the market.


Notes for editors: ‘‘It is Not Just Confusion! Strategic Uncertainty in an Experimental Asset Market’ by Eizo Akiyama, Nobuyuki Hanaki and Ryuichiro Ishikawa is published in the October 2017 issue of the Economic Journal.

Eizo Akiyama is at the University of Tsukuba. Nobuyuki Hanaki is at the Universite Cote d’Azur, CNRS, GREDEG. Ryuichiro Ishikawa is at Waseda University.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email:; Twitter: @econromesh); or Nobuyuki Hanaki via email: