The Role of Communication in Asset Market Experiments

This study investigates the effect of continuous, free-form communication among traders on mispricing in experimental asset markets. Using laboratory experiments, we compare three asset types with varying complexity regarding their payoff structures: a simple constant fundamental value, a moderately complex decreasing fundamental value, and a highly complex constant fundamental value with dividends and interest. Communication's impact is examined by allowing participants to engage in unrestricted text chat during market trading sessions. We hypothesize that the potential benefits of communication-such as reducing confusion, correcting misconceptions, and promoting common beliefs-would be more pronounced in more complex asset markets. However, results indicate that communication's effects are generally modest, with only a slight reduction in mispricing observed in the most complex asset scenario. Content analysis employing large language models reveals significant differences in the communication topics discussed, particularly highlighting strategy-related conversations in highly mispriced markets. Despite expectations that communication could substantially improve market efficiency, our findings suggest limited effectiveness, contingent upon the nature and complexity of the asset traded. This research contributes to understanding how trader communication influences asset pricing dynamics and extends insights into the institutional factors impacting market efficiency.