Information Aggregation with Costly Information and Random Ordering: Experimental Evidence

The cost of information is an often ignored factor in economic situations although the information acquisition behavior of the decision makers has a crucial influence on the outcome. In this experiment, we study an information aggregation process in which participants decide in a random sequence. Participants observe predecessors decisions and can acquire additional private information at a fixed price. We analyze participants information acquisition behavior and updating procedures. About one half of the individuals act rationally, whereas the other participants systematically overestimate the private signal value. This leads to excessive signal acquisitions and reduced conformity.

The effects of subject pool and design experience on rationality in experimental asset markets

Empirical evidence suggests that prices do not always reflect fundamental values and individual behavior is often inconsistent with rational expectations theory. We report the results of fourteen experimental markets designed to examine whether the interactive effect of subject pool and design experience tempers price bubbles and improves forecasting ability. Our main findings are: (i) price run-ups are modest and dissipate quickly when traders are knowledgeable about financial markets and have design experience; (ii) price bubbles moderate quickly when only a subset of traders are knowledgeable and experienced; and (iii) individual forecasts of price are not consistent with the predictions of the rational expectations model in any market.Financial markets

Asset prices and informed traders' abilities: evidence from experimental asset markets

This study reports the results of fifteen experimental asset markets designed to investigate the effects of forecasts on market prices, traders' abilities to assess asset value, and the link between the two. Across the fifteen markets, the authors investigate alternative forecast-generating processes. In some markets the process produces an unbiased estimate of asset value and in others a biased estimate. The processes generating the biased forecasts, though, are less variable than the process generating the unbiased forecast. The authors find that, in general, period-end asset price reflects private forecasts, regardless of the forecast-generating process. Subsequently, they investigate whether traders' abilities to use forecasts differ across the forecast-generating processes. The authors find that most are able to properly use unbiased forecasts. They refer to them as smart traders. By comparison, a significant proportion is unable to properly use biased forecasts (typically traders' adjustments for bias are insufficient). Linking market outcomes and traders' abilities, the authors find that asset price appears to properly reflect unbiased forecasts as long as the market includes at least two smart informed traders who have sufficient ability to influence market outcomes. To obtain a comparable result in markets with the biased forecast, at least three smart informed traders with sufficient ability to influence market outcomes are necessary.Forecasting ; Markets ; Financial markets ; Risk

The Curse of Knowledge in Economic Settings: An Experimental Analysis

In economic analyses of asymmetric information, better-informed agents are assumed capable of reproducing the judgments of less-informed agents. We discuss a systematic violation of this assumption that we call the "curse of knowledge." Better-informed agents are unable to ignore private information even when it is in their interest to do so; more information is not always better. Comparing judgments made in individual-level and market experiments, we find that market forces reduce the curse by approximately 50 percent but do not eliminate it. Implications for bargaining, strategic behavior by firms, principal-agent problems, and choice under un-certainty are discussed

Acquisition Activity in the United Kingdom: Parametric and Semi-Parametric Estimation

In this article we attempt to identify the nancial characteristics of takeover targets in UK using the period 1982-1990. The study analyses the relationship between bidders and targets, and targets and non-targets over two distinct sub-periods, 1982-1985 and 1986-1990 which are viewed as being homogenous. The rst period followed a deep recession which followed a distinct shift in Macroeconomic Policy after 1979. The second period was associated with nancial liberalisation in 1986 and the freeing up of Monetary policy that followed the Stock Market Crash in 1987. To facilitate this analysis, two bi-variate Logit models are estimated over each sub-period and over the period as a whole. The above models are used to test whether Merger and Acquisition behaviour has changed by under- taking a Likelihood Ratio based analogue of the Chow test. A General Modelling strategy is adopted to select variables as a mechanism for pre- cluding inconsistency and reducing the impact of collinearity. Comparison is also made with a semi-parametric estimator

The Winner's Curse under Behavioral Institutions

Empirically, social dilemma under information asymmetry are often much less pronounced than theory predicts. Traders experience a winner's curse and maintain efficiency enhancing exchange of commodities when theory predicts none. Especially under competition, cursed parties undergo severe losses and thereby fund social welfare. Hence, if one cures the winner's curse, one often decreases social welfare. Here, I test how market efficiency can be maintained without individual losses. In a competitive common value auction, parties sidestep both market inefficiency and a winner's curse by judging quality-by-price, and setting price-by-quality.imperfect information, common value auction, price-quality relation

Fuzzy Logic and Its Uses in Finance: A Systematic Review Exploring Its Potential to Deal with Banking Crises

The major success of fuzzy logic in the field of remote control opened the door to its application in many other fields, including finance. However, there has not been an updated and comprehensive literature review on the uses of fuzzy logic in the financial field. For that reason, this study attempts to critically examine fuzzy logic as an effective, useful method to be applied to financial research and, particularly, to the management of banking crises. The data sources were Web of Science and Scopus, followed by an assessment of the records according to pre-established criteria and an arrangement of the information in two main axes: financial markets and corporate finance. A major finding of this analysis is that fuzzy logic has not yet been used to address banking crises or as an alternative to ensure the resolvability of banks while minimizing the impact on the real economy. Therefore, we consider this article relevant for supervisory and regulatory bodies, as well as for banks and academic researchers, since it opens the door to several new research axes on banking crisis analyses using artificial intelligence techniques