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Costly Information Acquisition, Social Networks and Asset Prices: Experimental Evidence

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  • Halim, Edward
  • Riyanto, Yohanes Eko
  • Roy, Nilanjan

Abstract

We design an experiment to study the implications of information networks for the incentive to acquire costly information, market liquidity, investors' earnings and asset price characteristics in a financial market. Social communication crowds out information production as a result of agent's temptation to free ride on the signals purchased by their neighbors. Although information exchange among traders increases trading volume, improves liquidity and enhances the ability of asset prices to reflect the aggregate amount of information in the market, it fails to improve price accuracy. Net earnings are higher with information sharing due to reduced acquisition of costly signals.

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  • 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.
  • Handle: RePEc:pra:mprapa:80658
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    Cited by:

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    2. Ruiz-Buforn, Alba & Camacho-Cuena, Eva & Morone, Andrea & Alfarano, Simone, 2020. "Overweighting of public information in financial markets: A lesson from the lab," MPRA Paper 98472, University Library of Munich, Germany.
    3. Alfarano, Simone & Banal-Estanol, Albert & Camacho-Cuena, Eva & Iori, Giulia & Kapar, Burcu, 2020. "Centralized vs decentralized markets in the laboratory: The role of connectivity," MPRA Paper 99129, University Library of Munich, Germany.
    4. Farouq Abdulaziz Masoudy, 2018. "Accurate Evaluation of Asset Pricing Under Uncertainty and Ambiguity of Information," Papers 1801.06966, arXiv.org, revised Mar 2018.
    5. Oliver Rehbein & Simon Rother, 2020. "The Role of Social Networks in Bank Lending," ECONtribute Discussion Papers Series 033, University of Bonn and University of Cologne, Germany.
    6. Lionel Page & Christoph Siemroth, 2018. "How much information is incorporated in financial asset prices? Experimental Evidence," QuBE Working Papers 054, QUT Business School.

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    More about this item

    Keywords

    Asymmetric Information; Costly Information Acquisition; Experimental Asset Markets; Social Network; Uncertainty;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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