Do investors rely too much on public information to be justified by its accuracy? An experimental study

Simone Alfarano, Eva Camacho Cuena () and Andrea Morone

No 30, FinMaP-Working Papers from Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents

Abstract: The theoretical approach in dealing with the aggregation of information in markets in general, and financial markets in particular considers information as an exogenous element to the system, focusing just on conditions and consequences of the efficient incorporation of information into prices. The production and acquisition of the information is, therefore, not a major focus of the theoretical as well as the empirical analysis. We take the position that the composition of the spectrum of information sources affects the behavior of the traders in the information gathering process. In this paper we will study experimentally the information aggregation process in a market as a function of the access to different sources of information, namely an imperfect, public and costless signal into a market where the participants have access to costly and imperfect private information. We observe that the release of public information provokes a crowding-out effect on the traders' information demand for private information, it keeps constant market informativeness, but significantly reduces price efficiency in aggregating information. In particular we show that traders overweight public information that dominates the market dynamics. As a policy advise we recommend that eventual reforms on the regulation of financial institutions (for instance the credit rating agencies) should account for the complex interplay between private and public information that we have identified in our experiments and give incentives to the investors (institutional and/or private) to search for alternative sources of information.

Keywords: experiments; financial markets; private and public information; rating agencies (search for similar items in EconPapers)
JEL-codes: C92 D82 G14 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fmpwps:30

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