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Information acquisition in an experimental asset market

Author

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  • M. Middeldorp
  • S. Rosenkranz

Abstract

We use experimental evidence from a complex trading environment to evaluate the rational expectations theory of information acquisition in an asset market. Although theoretical predictions correctly identify the main drivers of information acquisition in our experimental data, we observe much higher levels of information acquisition. Our evidence suggests that this comes about because the theory overstates the informativeness of trading and thus predicts that few agents will want to buy information. We use indicators such as trading volume to confirm that information acquisition is sensitive to the informativeness of trading. We also test three other theories presented in recent models in the tradition of the rational expectations approach. We find some confirmation that subjects have a strategic incentive to increase their own acquisition in reaction to the acquisition of others. On the other hand, we find no indications of wealth effects or overconfidence in our experimental setup. Overall our evidence suggests that more realistic assumptions, particularly about the informativeness of trading, are needed to accurately predict the levels of information acquisition.

Suggested Citation

  • M. Middeldorp & S. Rosenkranz, 2008. "Information acquisition in an experimental asset market," Working Papers 08-25, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0825
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    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/309714/08_25.pdf
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    References listed on IDEAS

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    1. Gadi Barlevy & Pietro Veronesi, 2000. "Information Acquisition in Financial Markets," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 79-90.
    2. C.J.M. Kool & S. Rosenkranz & M. Middeldorp, 2007. "Listening Without Understanding : Central Bank Transparency, Financial Markets and the Crowding Out of Private Information," Working Papers 07-19, Utrecht School of Economics.
    3. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2009. "Measuring Strategic Uncertainty in Coordination Games," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 181-221.
    4. Elena Argentesi & Helmut Lütkepohl & Massimo Motta, 2010. "Acquisition of Information and Share Prices: An Empirical Investigation of Cognitive Dissonance," German Economic Review, Verein für Socialpolitik, vol. 11, pages 381-396, August.
    5. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    6. Diego García & Francesco Sangiorgi & Branko Urošević, 2007. "Overconfidence and Market Efficiency with Heterogeneous Agents," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(2), pages 313-336, February.
    7. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    8. Joël Peress, 2004. "Wealth, Information Acquisition, and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 879-914.
    9. Ko, K. Jeremy & (James) Huang, Zhijian, 2007. "Arrogance can be a virtue: Overconfidence, information acquisition, and market efficiency," Journal of Financial Economics, Elsevier, vol. 84(2), pages 529-560, May.
    10. Copeland, Thomas E & Friedman, Daniel, 1992. "The Market Value of Information: Some Experimental Results," The Journal of Business, University of Chicago Press, vol. 65(2), pages 241-266, April.
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    Cited by:

    1. M. Middeldorp & S. Rosenkranz, 2008. "Central bank communication and crowding out of private information in an experimental asset market," Working Papers 08-26, Utrecht School of Economics.

    More about this item

    Keywords

    Information and Financial Market Efficiency; Private Information Acquisition; Experimental Economics;

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