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Information Aggregation and the Cognitive Make-up of Market Participants

Brice Corgnet, Mark Desantis and David Porter

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Abstract: We assess the effect of the cognitive make-up of market participants on the informational efficiency of markets. We put forth that cognitive skills, such as cognitive reflection, are crucial for ensuring the informational efficiency of markets because they endow participants with the ability to infer others' information from prices. Using laboratory experiments, we show that information aggregation is significantly enhanced when (i) all participants possess high levels of cognitive sophistication and (ii) this high level of cognitive sophistication is common information for all participants. Our findings shed light on the cognitive and informational constraints underlying the efficient market hypothesis.

Keywords: Information aggregation; cognitive reflection; Experimental asset markets; behavioral finance (search for similar items in EconPapers)
Date: 2021-04-01
New Economics Papers: this item is included in nep-exp and nep-neu
Note: View the original document on HAL open archive server: https://hal.science/hal-03188235
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Published in European Economic Review, 2021, 133, 15 p

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