The CAPM in thin experimental financial markets

Abstract

We report on small-scale experiments of simple, repeated asset markets in two risky securities and one risk-free security. As in large-scale experiments, steady convergence towards the CAPM is discovered, but the process is slower and convergence halts before reaching the actual equilibrium. There is evidence that subjects gradually move up in mean-variance space, in accordance with the CAPM. Yet, adjustment stops, presumably because of subjects' hesitance in the face of market thinness. This hesitance can be optimal because of the multidimensional nature of the desired trades. Because of market thinness, subjects have difficulty implementing bundles of trades in a set of parallel markets ba..