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An experimental analysis of information acquisition in prediction markets

Lionel Page () and Christoph Siemroth

Games and Economic Behavior, 2017, vol. 101, issue C, 354-378

Abstract: We study which factors in terms of trading environment and trader characteristics determine individual information acquisition in experimental asset markets. Traders with larger endowments, existing inconclusive information, lower risk aversion, and less experience in financial markets tend to acquire more information. Overall, we find that traders overacquire information, so that informed traders on average obtain negative profits net of information costs. Information acquisition and the associated losses do not diminish over time. This overacquisition phenomenon is inconsistent with predictions of rational expectations equilibrium, and we argue it resembles the overdissipation results from the contest literature. We find that more acquired information in the market leads to smaller differences between fundamental asset values and prices. Thus, the overacquisition phenomenon is a novel explanation for the high forecasting accuracy of prediction markets.

Keywords: Asymmetric information; Experimental asset markets; Information acquisition; Prediction markets (search for similar items in EconPapers)
JEL-codes: C92 D82 D84 G10 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.geb.2015.11.002

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