We perform an asset market experiment in order to investigate whether overconfidence induces trading. We investigate three manifestations of overconfidence: calibration-based overconfidence, the better-than-average effect and illusion of control. Novelly, the measure employed for calibration-based overconfidence is task-specific in that it is designed to influence behavior. We find that calibration-based overconfidence does engender additional trade, though the better-than-average also appears to play a role. This is true both at the level of the individual and also at the level of the market. There is little evidence that gender influences trading activity.

In 12 sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is the probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).

In 12 sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is the probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).