To see is to believe: Common expectations in experimental asset markets

- We reevaluate the sources of mispricing in asset market experiments.
- We reassess the suggestion that mispricing is due to confusion, and reduced by training.
- We propose that training may also facilitate the formation of common expectations.
- To test this, we manipulate whether it is public knowledge that training occurred.
- We find that public knowledge has a distinct effect in addition to training alone.

We experimentally manipulate agents' information regarding the rationality of others in a setting in which previous studies have found irrationality to be present, namely the asset market experiments introduced by Smith et al. (1988). Recent studies suggest that mispricing in such markets may be an artefact of confusion, which can be reduced by training subjects to understand the diminishing fundamental value. We reconsider this view, and propose that when it is made public knowledge that training has occurred, this may also reduce uncertainty over the behavior of others and facilitate the formation of common expectations. Our design disentangles the direct effect of training from the indirect effect of its public knowledge, and our results demonstrate a distinct and statistically significant effect of public knowledge over and above that of training alone.