Informed traders’ performance and the information environment: Evidence from experimental asset markets
Lucy F. Ackert, Bryan K. Church, and Ping Zhang
Accounting, Organizations and Society, Vol. 70 (October 2018), pp. 1-15
Overview We designed 18 experimental markets to investigate the effect of the information environment on informed traders’ performance. We vary the number of informed traders across experimental markets, representing different information environments and posit that the cost of information affects traders’ ability to prosper. Traders bid to acquire costly but imperfect information on asset value, then participate in a double-auction asset market. Using the inverse relationship between cost of information and number of informed traders, we assessed whether traders can properly determine the value of the information under environments defined as enriched or impoverished based on the number of informed traders. We find that traders in an impoverished environment pay too much for information and, once informed, do not transact enough to recover its cost. Surprisingly, traders who compete for information that confers a strong advantage do worse than those who compete in an environment where information is more widely available.
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