Question

Describe the notion of a “bubble” as given in the film Mind over Money.  What did Vernon Smith’s experiment demonstrate?

Answer 1

In the film Mind over money, the bubble was described with the example of Dutch Tulip Bulbs in the 17th century Holland, where people were buying tulip bulbs at high prices with the assumption that someone else will be willing and able to pay for that tulip bulbs at an even higher price

This same thing happened during the U.S. 2008 financial crisis where the values in the market of housing went up and demand for housing, started growing enormously, and the speculative bubble eventually got burst to lead to an unprecedented fall in prices' and mortgage defaults?

Vernon Smith (2002 Nobel laureate in 'Experimental Economics') ran an experiment that demonstrates the fact that 'Experienced players' in the asset market based on their experience and not by logic or rational thought come to realize that the fundamental value' of the asset has started falling, and that's why they try to trade reasonably close to its fundamental value.

That's why bubbles tend to disappear for those people. But, they get there not by logic but experience. According to him, that's the way people in an economy tend to behave and reach that 'trading behavior' out of their experience.