Before and after: The impact of a real bubble crash on investors’ trading behavior in the lab

• We study the effect of experiencing a Boom/Crash in the naturally occurring market on laboratory trading behavior.
• We adopted a between-subject design and recruited investors in the Shanghai Stock Exchange.
• We find subjects in the Crash treatment more risk averse in the lottery-choice task.
• We also find that subjects in the Crash treatment make smaller trades and hold more cash rather than stocks.
• The change in general risk attitudes cannot fully explain the change in trading behavior.

We report the results of an experiment designed to study whether or not having experienced booms and crashes in naturally occurring asset markets affects subjects’ trading behavior in the lab. Active investors in the Shanghai Stock Exchange were recruited to participate in either the Boom treatment, conducted in June 2007 after the Shanghai Stock Exchange had had a bull market for almost 2 years, or the Crash treatment, conducted in August 2008 after the SSE composite index had plummeted almost 60% from its high reached in October 2007. We find that, compared to those in the Crash treatment, subjects in the Boom treatment were much more active when participating in our experimental asset markets in that they tended to made bigger trades and preferred to hold more shares than cash. These behavioral differences cannot be explained by the overconfidence hypothesis.