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

Author

Listed:
  • Brice Corgnet

    () (Emlyon Business School)

  • Cary Deck

    (University of Alabama & Chapman University)

  • Mark DeSantis

    (Chapman University)

  • Kyle Hampton

    (Chapman University)

  • Erik O. Kimbrough

    (Chapman University)

Abstract

The ability of markets to aggregate diverse information is a cornerstone of economics and finance, and empirical evidence for such aggregation has been demonstrated in previous laboratory experiments. Most notably Plott and Sunder (1988) find clear support for the rational expectations hypothesis in their Series B and C markets. However, recent studies have called into question the robustness of these findings. In this paper, we report the result of a direct replication of the key information aggregation results presented in Plott and Sunder. We do not find the same strong evidence in support of rational expectations that Plott and Sunder report suggesting information aggregation is a fragile property of markets.

Suggested Citation

  • Brice Corgnet & Cary Deck & Mark DeSantis & Kyle Hampton & Erik O. Kimbrough, 2019. "Reconsidering Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 19-11, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:19-11
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/269/
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    References listed on IDEAS

    as
    1. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(4), pages 347-400, December.
    2. 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.
    3. Benjamin J. Gillen & Charles R. Plott & Matthew Shum, 2017. "A Pari-Mutuel-Like Mechanism for Information Aggregation: A Field Test inside Intel," Journal of Political Economy, University of Chicago Press, vol. 125(4), pages 1075-1099.
    4. Hanson, Robin & Oprea, Ryan & Porter, David, 2006. "Information aggregation and manipulation in an experimental market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 449-459, August.
    5. Lionel Page & Christoph Siemroth, 2018. "How much information is incorporated in financial asset prices? Experimental Evidence," QuBE Working Papers 054, QUT Business School.
    6. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    7. Forsythe, Robert & Lundholm, Russell, 1990. "Information Aggregation in an Experimental Market," Econometrica, Econometric Society, vol. 58(2), pages 309-347, March.
    8. Cary Frydman & Nicholas Barberis & Colin Camerer & Peter Bossaerts & Antonio Rangel, 2014. "Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility," Journal of Finance, American Finance Association, vol. 69(2), pages 907-946, April.
    9. Brice Corgnet & Mark DeSantis & David Porter, 2015. "Revisiting Information Aggregation in Asset Markets: Reflective Learning & Market Efficiency," Working Papers 15-15, Chapman University, Economic Science Institute.
    10. Jürgen Huber & Martin Angerer & Michael Kirchler, 2011. "Experimental asset markets with endogenous choice of costly asymmetric information," Experimental Economics, Springer;Economic Science Association, vol. 14(2), pages 223-240, May.
    11. 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.
    12. Camerer, Colin & Dreber, Anna & Holzmeister, Felix & Ho, Teck Hua & Huber, Juergen & Johannesson, Magnus & Kirchler, Michael & Nave, Gideon & Nosek, Brian A. & Pfeiffer, Thomas, 2018. "Evaluating the replicability of social science experiments in Nature and Science between 2010 and 2015," SocArXiv 4hmb6, Center for Open Science.
    13. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    14. Peter Bossaerts, 2009. "What Decision Neuroscience Teaches Us About Financial Decision Making," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 383-404, November.
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    More about this item

    Keywords

    Aggregation; Efficient Markets; Rational Expectations; Experiments; Replication;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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