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Information Aggregation and the Cognitive Make-up of Traders

Author

Listed:
  • Brice Corgnet

    (Univ Lyon, emlyon business school)

  • Mark DeSantis

    (Argyros School of Business and Economics, Chapman University
    Economic Science Institute, Chapman University)

  • David Porter

    (Argyros School of Business and Economics, Chapman University
    Economic Science Institute, Chapman University)

Abstract

We put forth that cognitive skills, such as cognitive reflection, are crucial for ensuring the informational efficiency of markets because they endow traders with the ability to infer others’ information from prices. Using laboratory experiments, we show that information aggregation is significantly enhanced when (i) all traders possess high levels of cognitive sophistication and (ii) this high level of cognitive sophistication is common information for all traders. Our findings shed light on the cognitive and informational constraints underlying the efficient market hypothesis.

Suggested Citation

  • Brice Corgnet & Mark DeSantis & David Porter, 2020. "Information Aggregation and the Cognitive Make-up of Traders," Working Papers 20-18, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:20-18
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    References listed on IDEAS

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    More about this item

    Keywords

    Information Aggregation; Market Efficiency; Cognitive Skills; Cognitive Finance; Experimental Finance;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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