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Information Aggregation in a Catastrophe Futures Markets

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Listed:
  • Jason Shachat

    (National University of Singapore)

  • Anthony Westerling

    (UCSD)

Abstract

We experimentally examine a reinsurance market in which participants have differing information regarding the probability distribution over losses. The key question is whether the market equilibrium reflects traders maximizing value with respect to their different priors, or whether the equilibrium is one based on a common belief incorporating all participants’ information. When assuming subjects are expected value maximizers, we reject both full information aggregation and no information aggregation equilibria. We discover, as in past individual choice insurance experiments, that buyers under-assess the probabilities of large loss states, or alternatively, subjects assign larger utility values to losses than to comparable gains. After accounting for these decision theoretic concerns, the non-aggregation of information hypothesis explains the data better than full information aggregation.

Suggested Citation

  • Jason Shachat & Anthony Westerling, 2004. "Information Aggregation in a Catastrophe Futures Markets," Experimental 0403002, EconWPA.
  • Handle: RePEc:wpa:wuwpex:0403002
    Note: Type of Document - ; pages: 34
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    References listed on IDEAS

    as
    1. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-698, August.
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    3. McClelland, Gary H & Schulze, William D & Coursey, Don L, 1993. "Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 95-116, August.
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    7. Charles R. Plott & Jorgen Wit & Winston C. Yang, 2003. "Parimutuel betting markets as information aggregation devices: experimental results," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(2), pages 311-351, September.
    8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    9. Forsythe, Robert & Lundholm, Russell, 1990. "Information Aggregation in an Experimental Market," Econometrica, Econometric Society, vol. 58(2), pages 309-347, March.
    10. Franklin W Nutter, 1994. "The Role of Government in the United States in Addressing Natural Catastrophes and Environmental Exposures," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 19(3), pages 244-256, July.
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    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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