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Information Aggregation in a Catastrophe Futures Markets

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  • Jason Shachat

    (National University of Singapore)

  • Anthony Westerling

    (UCSD)

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.

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Bibliographic Info

Paper provided by EconWPA in its series Experimental with number 0403002.

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Length: 34 pages
Date of creation: 07 Mar 2004
Date of revision:
Handle: RePEc:wpa:wuwpex:0403002

Note: Type of Document - ; pages: 34
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Web page: http://128.118.178.162

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  1. 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.
  2. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
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  6. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 322.
  7. Franklin W Nutter, 1994. "The Role of Government in the United States in Addressing Natural Catastrophes and Environmental Exposures," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 19(3), pages 244-256, July.
  8. Holt, Charles A & Langan, Loren W & Villamil, Anne P, 1986. "Market Power in Oral Double Auctions," Economic Inquiry, Western Economic Association International, vol. 24(1), pages 107-23, January.
  9. Dean O'Hare, 1994. "The Need for Insurers to Change," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 19(3), pages 357-364, July.
  10. 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.
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