Affiliation: | (1) University of Copenhagen, Institute of Economics, Studistraede 6, 1455 Copenhagen, DENMARK;(2) Universitá Ca Foscari di Venezia, University of Venice, Dipartimento di Scienze Economiche, Cannareggio 873, 30121 Venezia VE, ITALY;(3) California Institute of Technology, Division of the Humanities and Social Sciences, Pasadena, CA 91125, USA |
Abstract: | Summary. Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term The Fundamental Coordination Principle of Information Transfer in Competitive Markets. The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the Fundamental Principle.The financial support of the national science foundation and the Caltech Laboratory for Experimental Economics and Political Science are gratefully acknowledged. The authors have benefited from helpful comments of David Grether, Kerry Back, Ivana Komunjer and Pete Kyle. |