Individual irrationality and lack of common knowledge of rationality in experimental asset markets VERY PRELIMINARY

We investigate the extent to which the “bubbles” and “crashes” in the experimental asset markets are due to individual irrationality and lack of common knowledge of rationality. We do so by comparing between the forecasted prices initially submitted by subjects in two market environments: (a) All the six traders are human subjects (6H) and (b) One human subject is interacting with five rational computer traders who assume all the traders are rational (1H5C). Results from our pilot experiment show that there is no significant difference in distribution of the initial deviations of the forecasted prices from the fundamental values in two market environments. Thus, we tentatively conclude that lack of common knowledge of rationality plays little role, but individual irrationality does, in experimental asset markets when subjects are inexperienced.