An experimental test on the hypothesis of strategic uncertainty

Abstract This study tests the influential hypothesis of strategic uncertainty (HSU) on the topic of bubble formation. We argue that if HSU holds, it shall apply to a stricter situation in which subjects in the market are rational, but none of them know the rationality distribution of others. The research strategies of exclusion and analogy are adopted to create a market that satisfies the two prerequisites of HSU. Briefly, a cohort of 24 participants in the same group is separated equally into three small groups using a pre‐determined rule within a 20‐period treatment. Group #1 is our primary concern, and its members comprise participants whose units of assets are zero with an auxiliary criterion by subjects' performance at the end of Period 5. Across sessions, we determine whether the regrouping criteria and group tags are displayed to subjects to control how hard it is for a trader to judge the distribution of others in his/her group. We observe that mispricing generally vanishes in both the experimental and control groups. This result delivers a negative judgement of HSU at the aggregate level. Observations at the individual level and the robustness experiments deliver the same judgement.