Via, the always excellent, Simoleon Sense, comes this paper (pdf) by Sheen S. Levine and Edward J. Zajac.
Abstract
Financial bubbles remain a challenge for economic theory. Puzzlingly, bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly controlled experimental markets, even when uncertainty is eliminated and calculating the expected returns should be a simple statistical exercise. We propose that bubbles can be understood as episodes of institutional logic. Such logic has been shown to play a pervasive role in the spread of beliefs, behavior, and practices among individuals and organizations, both in laboratory and field studies. We examine experimentally two alternative explanations for the appearance of bubbles: 1) that participants lack knowledge and eventually learn to price correctly and 2) that each participant overconfidently believes that her understanding of the situation is better than average. We find lack of support for either, and show that the appearance of bubbles is congruent with institutionalization processes, similar to those observed elsewhere in financial markets and organizations.
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