Information Aggregation Under Ambiguity: Theory and Experimental Evidence

Spyros Galanis, Christos Ioannou and Stelios Kotronis

The Review of Economic Studies, 2024, vol. 91, issue 6, 3423-3467

Abstract: We study information aggregation in a dynamic trading model. We show theoretically that separable securities, introduced by Ostrovsky in the context of Expected Utility, no longer aggregate information if some traders have imprecise beliefs and are ambiguity averse. Moreover, these securities are prone to manipulation as the degree of information aggregation can be influenced by the initial price set by the uninformed market maker. These observations are also confirmed in our laboratory experiment using prediction markets. We define a new class of strongly separable securities, which are robust to the above considerations and show that they characterize information aggregation in both strategic and non-strategic environments. We derive several testable predictions, which we are able to confirm in the laboratory. Finally, we show theoretically that strongly separable securities are both sufficient and necessary for information aggregation but, strikingly, there does not exist a security that is strongly separable for all information structures.

Keywords: Information aggregation; Ambiguity aversion; Financial markets; Prediction markets; Experiments (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Information Aggregation Under Ambiguity: Theory and Experimental Evidence (2023)
Working Paper: Information Aggregation Under Ambiguity: Theory and Experimental Evidence (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:91:y:2024:i:6:p:3423-3467.

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