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Poster Session C: Friday, August 15, 2:00 – 5:00 pm, de Brug & E‑Hall

An Excessive-Demand Measure Outperforms Other Demand Proxies in Explaining Lab Asset-Market Price Changes: Toward a Brain Biomarker of Excessive Demand

John L. Haracz¹; ¹Indiana University at Bloomington

Presenter: John L. Haracz

Dynamic stochastic general equilibrium models have been criticized for failing to forecast the Global Financial Crisis. This and other flaws of neoclassical economics are proposed to arise partly from the failure of equilibrium-based models to capture excessive demand, which exceeds the balanced excess demand in general equilibrium theory. Excessive demand is defined as demand that promotes disequilibria in asset or goods markets and drives prices above fundamental values (e.g., an asset-price bubble). Neuroimaging studies are elucidating the neuroeconomics of asset-price bubbles. However, these studies have been limited in characterizing individual-level brain-behavior relationships due to the lack of a subject-level excessive-demand measure (EDM). The present study makes such a measure available. In a standard lab asset-market design, 9 experiments each included 9 subjects. Experiments consisted of 15 2.5-minute periods of trading cash and a risky asset. To capture excessive demand, the end of each Period 1-14 was followed by a survey that elicited each subject’s number of asset shares that they want to hold at the end of the next period. This measure was designed to tap into anticipatory affect that may drive price bubbles. Two other predictive measures included excess bids and price-change momentum. A market-level EDM, which explained 34.5% of the variance in asset-price changes, outperformed the excess-bids and momentum measures, which each explained less than 10% of this variance. The EDM’s outperformance in predicting price changes aligns with numerous other findings that underscore the predictive power of measures related to anticipatory affect. For example, neuroimaging-measured activity in nucleus accumbens, an area implicated in anticipatory affect, performed better than choice behavior in forecasting crowdfunding outcomes. Similarly, the survey-elicited EDM, which may reflect anticipatory affect, was a better price-change predictor than the behavioral excess-bids measure. Therefore, the presently introduced EDM may facilitate finding an excessive-demand biomarker with market-price predictive power.

Topic Area: Reward, Value & Social Decision Making

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