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Information aggregation in a catastrophe futures market

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Author Info
Jason Shachat (National University of Singapore, Singapore)
Anthony Westerling (University of California, San Diego, USA)

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Abstract

We experimentally examine a reinsurance market in which participants have differing information regarding the probability distribution over losses. The key question is whether the market equilibrium reflects traders maximizing value with respect to their different priors, or whether the equilibrium is one based on a common belief incorporating all participants' information. When assuming subjects are expected value maximizers, we reject both full information aggregation and no information aggregation equilibria. We discover, as in past individual choice insurance experiments, that buyers under-assess the probabilities of large loss states, or alternatively, subjects assign larger utility values to losses than to comparable gains. After accounting for these decision theoretic concerns, the non-aggregation of information hypothesis explains the data better than full information aggregation. Copyright © 2006 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1283
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 27 (2006)
Issue (Month): 6 ()
Pages: 477-495
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Handle: RePEc:wly:mgtdec:v:27:y:2006:i:6:p:477-495

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. McClelland, Gary H & Schulze, William D & Coursey, Don L, 1993. " Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 95-116, August.
  2. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 322. [Downloadable!] (restricted)
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  3. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-98, August. [Downloadable!] (restricted)
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  4. Holt, Charles A & Langan, Loren W & Villamil, Anne P, 1986. "Market Power in Oral Double Auctions," Economic Inquiry, Oxford University Press, vol. 24(1), pages 107-23, January.
  5. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September. [Downloadable!] (restricted)
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  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  7. Charles R. Plott & Jorgen Wit & Winston C. Yang, 2003. "Parimutuel betting markets as information aggregation devices: experimental results," Economic Theory, Springer, vol. 22(2), pages 311-351, 09. [Downloadable!] (restricted)
  8. Steven Gjerstad & Jason Shachat, 1996. "A General Equilibrium Structure for Induced Supply and Demand," University of California at San Diego, Economics Working Paper Series 96-35, Department of Economics, UC San Diego. [Downloadable!]
  9. Forsythe, Robert & Lundholm, Russell, 1990. "Information Aggregation in an Experimental Market," Econometrica, Econometric Society, vol. 58(2), pages 309-47, March. [Downloadable!] (restricted)
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