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Information Aggregation in Experimental Asset Markets: Traps and Misaligned Beliefs

Listed author(s):
  • Noeth, Markus
  • Camerer, Colin F.
  • Plott, Charles R.
  • Webber, Martin

The capacity of markets to aggregate information has been conclusively demonstrated but the limitations of that capacity have still not been fully explored. In this paper, we demonstrate the existence of "information traps". These traps appear to be a sort of equilibrium in which information existing in the market does not become revealed in prices. The foundation for the equilibrium is a pattern of misaligned beliefs in which each person's actions are based upon mistaken beliefs about the information held by others. The mistakes, themselves, have a type of mutual compatibility and cannot become revealed by the price discovery process because individuals have no incentives or resources to adjust. Attempts to probe the nature of the phenomena involved two period markets with a contingent claim instrument, experienced participants, and unlimited short selling opportunities.

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Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 1060.

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Date of creation: Apr 1999
Publication status: Published:
Handle: RePEc:clt:sswopa:1060
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Order Information: Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125

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