The power of words in financial markets: soft versus hard communication,a strategy method experiment

Abstract

The main objective of this paper is to analyze the impact of non-informative communications on asset prices. An experimental approach allows us to control for the release of non-relevant messages. We introduce the release of messages in standard experimental asset markets with bubbles (Smith, Suchanek and Williams 1988) through a strategy method experiment. We conjecture that a priori uninformative messages can significantly impact the level of asset prices. Uninformative communications may be used by boundedly rational subjects to compute the fundamental value of the asset. In addition, rational agents may anticipate such an effect and adapt their strategy to the messages received. We asked 182 subjects to construct strategies about their action in a standard experimental asset market environment. Our analysis sheds light on the possibility of manipulation and stabilization of financial markets by influential agents such as financial “gurus” or central bankers.experiment