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An experimental analysis of information acquisition in prediction markets

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  • Page, Lionel
  • Siemroth, Christoph

Abstract

We study which factors in terms of trading environment and trader characteristics determine individual information acquisition in experimental asset markets. Traders with larger endowments, existing inconclusive information, lower risk aversion, and less experience in financial markets tend to acquire more information. Overall, we find that traders overacquire information, so that informed traders on average obtain negative profits net of information costs. Information acquisition and the associated losses do not diminish over time. This overacquisition phenomenon is inconsistent with predictions of rational expectations equilibrium, and we argue it resembles the overdissipation results from the contest literature. We find that more acquired information in the market leads to smaller differences between fundamental asset values and prices. Thus, the overacquisition phenomenon is a novel explanation for the high forecasting accuracy of prediction markets.

Suggested Citation

  • Page, Lionel & Siemroth, Christoph, 2017. "An experimental analysis of information acquisition in prediction markets," Games and Economic Behavior, Elsevier, vol. 101(C), pages 354-378.
  • Handle: RePEc:eee:gamebe:v:101:y:2017:i:c:p:354-378
    DOI: 10.1016/j.geb.2015.11.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ambroise Descamps & S´ebastien Massoni & Lionel Page, 2017. "Knowing When to Stop and Make a Choice, an Experiment on Optimal Sequential Sampling," QuBE Working Papers 048, QUT Business School.
    2. Halim, Edward & Riyanto, Yohanes Eko & Roy, Nilanjan, 2017. "Costly Information Acquisition, Social Networks and Asset Prices: Experimental Evidence," MPRA Paper 80658, University Library of Munich, Germany.
    3. Brice Corgnet & Cary Deck & Mark Desantis & David Porter, 2017. "Information (Non)Aggregation in Markets with Costly Signal Acquisition," Working Papers halshs-01686493, HAL.
    4. Lionel Page & Christoph Siemroth, 2018. "How much information is incorporated in financial asset prices? Experimental Evidence," QuBE Working Papers 054, QUT Business School.

    More about this item

    Keywords

    Asymmetric information; Experimental asset markets; Information acquisition; Prediction markets;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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