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Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets

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  • Plott, Charles R
  • Sunder, Shyam

Abstract

The study explores the information aggregation properties of experimental markets. A fully-revealing rational expectations equilibrium exists in the competitive model of each of the markets studied. For markets with a single compound security in which traders have identical preferences, the rational expectations equilibrium mod el works well. However, if traders are allowed to have different preferences in the single security case, the observed information aggregation is minimal and rational expectations are not attained. If the single security is transformed to a complete set of Arrow-Debreu , state-contingent claims, the rational expectations model works well even when preferences differ. Copyright 1988 by The Econometric Society.

Suggested Citation

  • 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.
  • Handle: RePEc:ecm:emetrp:v:56:y:1988:i:5:p:1085-1118
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    1. Elmendorf, Douglas W & Kimball, Miles S, 2000. "Taxation of Labor Income and the Demand for Risky Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 801-833, August.
    2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    3. Meyer, Jack & Ormiston, Michael B, 1985. "Strong Increases in Risk and Their Comparative Statics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 425-437, June.
    4. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
    5. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
    6. Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-1054, December.
    7. Gollier, Christian & John W. PRATT, 1993. "Weak Proper Risk Aversion And The Tempering Effect of Background Risk," Working Papers 018, Risk and Insurance Archive.
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