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Information aggregation in Arrow–Debreu markets: an experiment

Author

Listed:
  • Lawrence Choo

    (University of Erlangen-Nuremberg, Chair of Economic Theory)

  • Todd R. Kaplan

    (University of Exeter
    University of Haifa)

  • Ro’i Zultan

    (Ben-Gurion University of the Negev)

Abstract

Studies of experimental and betting markets have shown that markets are able to efficiently aggregate information dispersed over many traders. We study information aggregation in Arrow–Debreu markets using a novel information structure. Compared to previous studies, the information structure is more complex, allows for heterogeneity in information among traders—which provides insights into the way in which information is gradually disseminated in the market—and generates situations in which all traders hold identical beliefs over the traded assets’ values, thus providing a harsh stress test for belief updating. We find little evidence for information aggregation and dissemination in early rounds. Nonetheless, after traders gain experience with the market mechanism and structure, prices converge to reveal the true state of the world. Elicited post-market beliefs reveal that markets are able to efficiently aggregate dispersed information even if individual traders remain uninformed, consistent with the marginal trader hypothesis.

Suggested Citation

  • Lawrence Choo & Todd R. Kaplan & Ro’i Zultan, 2019. "Information aggregation in Arrow–Debreu markets: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 22(3), pages 625-652, September.
    • Handle: RePEc:kap:expeco:v:22:y:2019:i:3:d:10.1007_s10683-017-9548-x
    DOI: 10.1007/s10683-017-9548-x
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    Cited by:

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    3. Stefan Palan & Jürgen Huber & Larissa Senninger, 2020. "Aggregation mechanisms for crowd predictions," Experimental Economics, Springer;Economic Science Association, vol. 23(3), pages 788-814, September.
    4. Corgnet, Brice & Deck, Cary & DeSantis, Mark & Porter, David, 2018. "Information (non)aggregation in markets with costly signal acquisition," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 286-320.
    5. Ahrash Dianat & Christoph Siemroth, 2021. "Improving decisions with market information: an experiment on corporate prediction markets," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 143-176, March.
    6. Antonio, Filippin & Marco, Mantovani, 2019. "Risk Aversion and Information Aggregation in Asset Markets," Working Papers 404, University of Milano-Bicocca, Department of Economics, revised Apr 2019.

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    More about this item

    Keywords

    Information aggregation; Prediction markets; Arrow–Debreu markets; Red hat puzzle;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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