The title is a unbelievable deceptive because, unless I missed something, all of these experiments were done on completely unregulated toy markets.<p>I would be curious about what would happen if, instead of rewarding people directly with the returns on their trades and their dividends, you gave them a baseline salary that they can never go under, then gave them a bonus based on a percentage the gained market value of their holdings during any particular round, but ended their game if they ranked below 50% of the other players for two rounds in a row then gave them severance equal to five times their baseline salary plus their average bonus per round over the entire game.<p>In short, I'd be interested in how far fiduciary investment bubbles would deviate from the bubbles produced by direct investors in these same safe markets, and whether changing any of the variables above could bring them closer together.
If asset bubbles are part of the human condition, then why have they been so rare? There was tulip mania in Holland in 1637. The South Sea Bubble of 1719-1721. The canal overbuilding bubble in England in the 1820s. In the USA, there was the Florida land boom in the 1920s, ending in 1926, and then from 1926 to 1929 there was the stock market bubble. There was the Japanese real estate bubble of the 1980s, and a similar, smaller bit of overbuilding in the USA. Then there was the dotcom bubble in the USA stock market during the 1990s, and then the real estate boom of the 00s.<p>Those are the big ones.<p>Why were there no bubbles before 1637? In a word: government. Under a feudal regime, people are not free to do what they want with their money, therefore there were no bubbles. People were not free to bid up the prices of assets - most assets are illiquid under feudal regimes. The fact that a heavy-handed monarch can suppress markets and therefore make bubbles impossible is a fairly strong argument toward government effectiveness in stopping bubbles. Likewise, the lack of asset bubbles in the USA from 1932 to about 1982 also suggests the effectiveness of government in suppressing bubbles.<p>Of course, one might argue that we want bubbles, that such freedom of investment has positive consequences, or that heavy-handed government, while creating some benefits, also imposes large costs that outweigh whatever benefits are being offered. But that would be a separate issue.
The people in their study (a group of 12, "bunch of volunteers, usually undergraduates but sometimes businesspeople or graduate students") don't seem like a group that would actually understand the value of their assets despite the value being explicitly clear for purposes of this study. They should do the study with a group of 100 financial experts and see if the results are the same.
It sounds like the biggest problem with this study (and with many markets) was that there was no way to efficiently sell short.<p>If it's only possible to make money when asset prices go up, some rational individuals will buy in even when they think the price is already too high, because until they own the asset, they can't profit from it.
Even if we grant the basic premise of the article (that regulation can't stop bubbles), that still doesn't rule regulation out. After all, it still doesn't prove that the government can't do anything to lessen the impact of a bubble.
It sounds like that experiment is flawed, but the article doesn't go into detail about what the participants are told. At any rate, you can't draw the conclusion it does from that experiment as given and then extrapolate it to the outside world.<p>IF you put any group of people together for an experiment, and give them nothing else to do, they are going to trade. especially fake money because there's no real risk. Unnecessary trading is going to result in abberant activity.<p>The bubbles we've had in our economy are due specifically to government forcing interest rates below their market level. You do that and you give institutions the power to make free money-- buy from the government at %x, invest it in low risk situations like mortgages at %Y and then pay back the government in devalued currency (due to inflation) at %Z. In each of those steps you make money...so, its a no-brainer.<p>If you want to stop having bubbles, remove the power to set interest rates from the federal reserve / government. Then the market has a chance to self regulate.<p>Right now the primary price signal that would keep bubbles from inflating is being held down, and the natural bubble prevention is being short circuited.<p>So, it is no wonder that bubbles are happening. The sad thing is that this is not a very controversial or difficult subject, but it is rare to find an article in a publication like the Atlantic that seems even aware of the effect of interest rates on interest bearing securities!<p>The reason that the mainstream media and government pretends like they aren't manipulating us into bubbles is very simple: Letting interest rates operate normally would also put a restraint on reckless government spending.