Private and public discrepancy : the anatomy of valuation in market

Abstract

The popular explanations of market bubbles, based on the classical economic assumption that market prices incorporate market participants' private valuations, argue that bubbles are caused by the collective delusion of individual participants who have false beliefs of fundamental values. An emerging institutionalist approach of research, in contrast, argues that bubbles can be produced even if rational investors collectively have the resources to correct mispricing, implying that market price doesn't necessarily incorporate true private beliefs. The primary analysis of my dissertation tests the two competing explanations in the context of the Beijing real estate market, where the collective delusion explanation seems particularly appropriate since amateur participants dominate this market. However, my analysis of the unique survey data shows systematic and precise evidence that bubble-era prices do not equal the mean of private valuations, which strongly supports the institutionalist approach. The second analysis of my dissertation is to answer the question that how market price has been driven up in the circumstance that the majority of market participants regarded the properties as overpriced. My results shed light on a novel explanation in the institutionalist approach by showing that the market was driven by market participants who were drawing incorrect inferences about other participants' beliefs-they overestimated the degree of others' support to the price, though they personally did not endorse the price. They therefore chose "dancing"-speculating but exiting from the market before the burst of the bubbles-as the optimal strategy, but it is actually suboptimal in such a situation and fuels the bubble. The third analysis of my dissertation is to understand the logics of market participants' behaviors in depth by examining their opinions on "popular theories"-the theories or models that were widely used to justify the bubble-era price. My analysis shows that, first, these popular theories reflect market participants' perceptions of the institutional influences on the real estate market in this country. Second, market participants' perceptions of the stability of the social and political institutions led them to be tolerant of market inefficiency, though they had fully realized such inefficiency. Theoretical and policy implications are discussed.