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Updating Awareness and Information Aggregation

Spyros Galanis and Kotronis Stelios ()
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Kotronis Stelios: Department of Economics, City, University of London, London, UK

The B.E. Journal of Theoretical Economics, 2021, vol. 21, issue 2, 613-635

Abstract: The ability of markets to aggregate information through prices is examined in a dynamic environment with unawareness. We find that if all traders are able to minimally update their awareness when they observe a price that is counterfactual to their private information, they will eventually reach an agreement, thus generalising the result of Geanakoplos and Polemarchakis (1982). Moreover, if the traded security is separable, then agreement is on the correct price and there is information aggregation, thus generalizing the result of Ostrovsky (2012) for non-strategic traders. We find that a trader increases her awareness if and only if she is able to become aware of something that other traders are already aware of and, under a mild condition, never becomes aware of anything more. In other words, agreement is more the result of understanding each other, rather than being unboundedly sophisticated.

Keywords: agreement; information aggregation; unawareness; financial markets; information markets; prediction markets; D80; D82; D83; D84; G14; G41 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/bejte-2018-0193

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