Markets and the Use of Knowledge---Testing the "Hayek Hypothesis" in Experimental Stock Markets

A broad strand in experimental economics has been devoted to testing the "Hayek hypothesis", which is commonly understood as the proposition that competitive markets conform to basic efficiency postulates. The precise content of this hypothesis, however, often remains fairly vague. We begin by restating the "Hayek hypothesis" in the light of theoretical work, which leads us to identifying three central elements of the hypothesis. Building on this restatement, we review the literature on experimental (market) economics and show how this literature has progressed from testing the first element of the "Hayek hypothesis" to testing all three elements simultaneously. Very recently, a number of scholars have moved these tests out of the laboratory, establishing political stock markets as a new type of field experiment. These political stock markets can be viewed as the toughest tests the "Hayek hypothesis" has been subjected to so far, and they have tended to support it. In the final section of the present paper, we outline some design features of the "Passauer Wahlboerse", an ongoing political stock market experiment being run at the Universitaet Passau, and indicate a few differences between this experiment and previous work.