Plott, C. and S. Sunder. (1988). "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets." Econometrica, 56, 1085--118.  Home/Search   Document Not in Database   Summary   Related Articles   Check

....is distributed across many sources. Supporting evidence can be found in empirical studies of options markets [14] political stock markets [7, 8, 22] sports betting markets [3, 9, 27] horse racing markets [30] market games [23, 24] and laboratory investigations of experimental markets [6, 25, 26]. The process of information incorporation is, at its essence, a distributed computation. Each trader begins with his or her own information. As trades are made, summary information is revealed through market prices. Traders learn or infer what information others are likely to have by observing ....

C. R. Plott and S. Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085--1118, 1988.

....is high that the price of the underlying stock will go up, regardless of risk exposure to changes in the stock price. Because traders stand to earn a profit if they can make e#ective probability assessments, often prices in financial markets yield very accurate aggregate forecasts of future events [10, 29, 27, 28]. Real securities markets have complex payo# structures with various triggers. However, these can all be modeled as collections of more basic or atomic Arrow Debreu securities [1, 8, 20] One unit of one Arrow Debreu security pays o# one dollar if and only if (i#) acorresponding binary event ....

CharlesR.Plott and Shyam Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085--1118, 1988.

....explanation is that prices reveal to the ignorant agents any initially private information; that is, agents learn by observing prices. Several studies demonstrate that, in a laboratory setting, securities markets are often able to aggregate information correctly, as postulated by RE theory [9, 23, 24, 22]. Beyond the controlled setting of the laboratory, empiricists have analyzed the forecast accuracy of public markets. Perhaps the most direct tests involve sports betting markets. Several studies demonstrate that odds on horses correlate well with the actual frequencies of victory at the track ....

Charles R. Plott and Shyam Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085--1118, 1988.

.... match very closely with the horses actual frequencies of winning [1, 30, 32, 33, 35] and point spread betting markets yield unbiased predictions of sporting event outcomes [14] Several studies demonstrate that, in a laboratory setting, markets are often able to aggregate information optimally [10, 25, 26, 27]. In a game without monetary rewards, incentives to reveal information presumably derive from entertainment value, educational value, bragging rights, and or other intangible sources. Our recent investigations [22, 23] conclude that even market games show signs of collective competence. For ....

C. R. Plott and S. Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085-1118, 1988.

....a subset of horses would de nitely not win. Although all subjects were uncertain as to the outcome, their collective information was enough to identify the winning horse with certainty. Information aggregation did occur, and RE based predictions t the data well. In earlier work, Plott and Sunder [16, 17] conducted laboratory experiments to test the reasonableness of the RE assumption in the context of a securities market. Subjects were initially unaware which of three states would occur. In one study [16] privileged insiders were given categorical knowledge of the underlying state. The RE ....

....were aware of the true state were signi cantly more accurate than those of other models, including the classical Walrasian hypothesis that agents do not revise their beliefs based on prices. When insiders were given less than certain information, the results were not de nitive. In a second study [17], insiders were told only that one of the three states would not occur. The combined knowledge of all subjects was sucient to logically infer the true state, though no single insider could directly do so. 2 Insurance contracts, futures, options, derivatives, and even stocks can be modeled as ....

Charles R. Plott and Shyam Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085-1118, 1988.

.... this design does make it hard to interpret the experiments, because asset pricing theory does not allow for di#erentiation 12 of dividends across investors (nor is it allowed in naturally occuring financial markets such as the NYSE 4 ) Examples of experiments on information aggregation are [2, 15, 18, 19, 22, 25, 34, 39, 41, 48, 49]. 5 As mentioned before, thinking about information aggregation led to the (fairly loose) E#cient Markets Hypothesis (EMH; see [23, 24] followed by extensions of equilibrium notions aimed at understanding EMH, namely, the fully revealing rational expectations equilibrium (FRREE; 30, 35, 45] ....

....aggregation when aggregate risk was fully knowable. These include experiments with a single risky security with common payo# for everybody, or with a complete, uniform (same number for each subject state) set of state contingent claims. Both designs are studied in, e.g. the seminal paper [41]. Theory predicts that FRREE would obtain, and indeed, these experimental designs do generate the best support of full information aggregation. In [41] one design involved a complete set of contingent claims, though with di#erent payo#s depending on the holder. Hence, the aggregate risk could ....

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PLOTT, Charles R. and Shyam SUNDER [1988], Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets, Econometrica 56, 1085-1118

....experiments, subjects were given probabilistic evidence in the form of a sample of random draws from the true distribution. Some weak aggregation did occur, but not to the extent predicted by the RE model; instead, a prior information model proved more accurate. In earlier work, Plott and Sunder [60, 61] conducted laboratory experiments to test the reasonableness of the RE assumption in the context of a securities market. Agents were initially unaware which of three states would occur. In one study [60] privileged insiders were given categorical knowledge of the underlying state. The RE model s ....

....aware of the true state were signi cantly more accurate than those of other models, including the classical Walrasian or PI hypothesis that agents do not revise their beliefs based on prices. When insiders were given less than certain information, the results were not de nitive. In a second study [61], insiders were told only that one of the three states would not occur. The combined knowledge of all agents was sucient to logically infer the true state, though no single insider could directly do so. It was found that, in a complete market of three securities, the RE predictions were again the ....

Charles R. Plott and Shyam Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085-1118, 1988.

....convergence to the rational expectation equilibrium (REE) occurs in markets that pays diverse dividends to different traders. They attribute the success of the RE model to the fact that traders learn about the equilibrium price and the state simultaneously from market conditions. The results by Plott Sunder (1988) and Forsythe Lundholm (1990) on the other hand, show that a market aggregates diverse information efficiently only under certain conditions: identical preferences, common knowledge of the dividend structure, complete contingent claims. These studies provide examples of failure of the RE model ....

....In the market of diverse information and diverse dividends (Experiment 3) the end of period price does not come close to the REE price. We recognize that a market with diverse information is a more difficult scenario than one with insider information. In similar experiments with human subjects, Plott and Sunder (1988) show that information aggregation was unsuccessful in a market with diverse dividends, attributing the failure to the complexity involved to inferring the state from market information. In two other sets of experiments, they found that the market aggregates information efficiently by having ....

Plott, C. R. & Sunder, S. (1988), `Rational expectations and the aggregation of diverse information in laboratory settings', Econometrica 56, 1085--1118.

....convergence to the rational expectation equilibrium (REE) occurs in markets that pays diverse dividends to di#erent traders. They attribute the success of the RE model to the fact that traders learn about the equilibrium price and the state simultaneously from market conditions. The results by Plott Sunder (1988) and Forsythe Lundholm (1990) on the other hand, show that a market aggregates diverse information e#ciently only under certain conditions: identical preferences, common knowledge of the dividend structure, complete contingent claims. These studies provide examples of failure of the RE model ....

....In the market of diverse information and diverse dividends (Experiment 3) the end of period price does not come close to the REE price. We recognize that a market with diverse information is a more di#cult scenario than one with insider information. In similar experiments with human subjects, Plott and Sunder (1988) show that information aggregation was unsuccessful in a market with diverse dividends, attributing the failure to the complexity involved to inferring the state from market information. In two other sets of experiments, they found that the market aggregates information e#ciently by having ....

Plott, C. R. & Sunder, S. (1988), `Rational expectations and the aggregation of diverse information in laboratory settings', Econometrica 56, 1085--1118.

....proxying for differences in preferences between the two traders) prices still converge to the REE. They attribute the success of the RE model to the fact that traders learn about the equilibrium price and the state of nature simultaneously from market conditions. On the other hand, results by Plott Sunder (1988) and Forsythe Lundholm (1990) show that a market aggregates diverse information efficiently only under certain conditions: identical preferences, common knowledge of the dividend structure, and complete contingent claims. These studies provide examples of the failure of the RE model and suggest ....

....REE price. We recognize that a market with diverse information is a more difficult scenario than one with insider information. In 10 This is approximate because their beliefs, conditioned on the market prices, can affect their estimates of the price. 19 similar experiments with human subjects, Plott and Sunder (1988) show that information aggregation was unsuccessful in a market with heterogeneous preferences, and they attributed the failure to the complexityinvolved to inferring the state from market information. In two other sets of experiments, they found that the market aggregates information efficiently ....

Plott, C. R. & Sunder, S. (1988), `Rational expectations and the aggregation of diverse information in laboratory settings', Econometrica 56, 1085--1118.

.... period end value with certainty (e.g. Plott and Sunder [1982] Banks [1985] and Sunder [1992] whereas imperfect information reveals value with a known probability (Ackert, Church, and Shehata [1997b] Incomplete information allows traders to reduce the number of possible outcome values (e.g. Plott and Sunder [1988], Forsythe and Lundholm [1990] Ackert and Church [1998b] 2. Informed traders are not expected to generate greater net profit than the uninformed because, under such conditions, everyone would have an incentive to acquire the forecast. 3. Markets 1, 7, 8, and 5x each included one participant who ....

Plott, C.R.; and S. Sunder. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets." Econometrica 56 (September 1988): 1085-118.

....convergence to the rational expectation equilibrium #REE# occurs in markets that pays diverse dividends to di#erent traders. They attribute the success of the RE model to the fact that traders learn about the equilibrium price and the state simultaneously from market conditions. The results by Plott Sunder #1988# and Forsythe Lundholm #1990#, on the other hand, show that a market aggregates diverse information e#ciently only under certain conditions: identical preferences, common knowledge of the dividend structure, complete contingent claims. These studies provide examples of failure of the RE model ....

....In the market of diverse information and diverse dividends #Experiment 3#, the end of period price does not come close to the REE price. We recognize that a market with diverse information is a more di#cult scenario than one with insider information. In similar experiments with human subjects, Plott and Sunder #1988# show that information aggregation was unsuccessful in a market with diverse dividends, attributing the failure to the complexityinvolved to inferring the state from market information. In two other sets of experiments, they found that the market aggregates information e#ciently byhaving ....

Plott, C. R. & Sunder, S. #1988#, `Rational expectations and the aggregation of diverse information in laboratory settings', Econometrica 56, 1085#1118.

....has been that prices can be computed explicitly, such that the success of the experiments can directly be measured in terms of the distances between observed and theoretical price levels. Examples of such experiments in the area of financial economics include Forsythe, Palfrey and Plott [1984] Plott and Sunder [1988], Smith, Suchanek and Williams [1988] Forsythe and 1 Analogously, an understanding of the biochemistry of isolated processes within cells does not allow one to readily predict the behavior of complex cellular structures such as human beings. 4 Lundholm [1990] Camerer and Weigelt [1993] Lei, ....

Plott, C.R. and S. Sunder (1988): "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica 56, 1085-1118.

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Plott, C. and S. Sunder. (1988). "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets." Econometrica, 56, 1085--118.

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C. Plott and S. Sunder, Rational expectations and the aggregation of diverse information in laboratory security markets, Econometrica, 56 (1988) 1085--118.

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C. Plott and S. Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56:1085--118, 1988.

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C.R. Plott and S. Sunder, 1988, Rational expectations and the aggregation of diverse information in laboratory security markets, Econometrica 56:5, 1085-1118.

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Plott, Charles and Shyam Sunder (1988), Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets, Econometrica 56(5), 1085-1118.

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Plott, C. and S. Sunder (1988): "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, 56, 10851118.

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Charles R. Plott and Shyam Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085--1118, 1988.

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C. R. Plot and S. Sunder. Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets. Econometrica, vol. 56, No. 5, 1085-1118, (1988).

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C. R. Plott, S. Sunder, Rational expectations and the aggregation of diverse information in laboratory security markets, Econometrica 56 (5) (1988) 1085-- 1118.

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C. R. Plott and S. Sunder. Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56(5):1085--1118, 1988. 23

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