We report the results of an experiment designed to study the role of speculation in theudformation of bubbles and crashes in laboratory asset markets. In a setting in whichudspeculation is not possible, bubbles and crashes are observed. The results suggest that theuddepartures from fundamental values are not caused by the lack of common knowledge ofudrationality leading to speculation, but rather by behavior that itself exhibits elements ofudirrationality. Much of the trading activity that accompanies bubble formation, in marketsudwhere speculation is possible, is due to the fact that there is no other activity available forudparticipants in the experiment.
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