The rapidity of price adjustments to information

This analysis suggests a relationship between the rapidity of price adjustments to information and the accuracy or reliability of the information, as it is perceived by investors. To understand this relationship, we construct a competitive two-person trading game in which investors use an equilibrium strategy to determine their level of investment in information processing. Then, we relate this equilibrium level to the rapidity of price adjustments. The relationship is subtle, however, and in different circumstances the rapidity of price adjustments may increase or decrease as the level of accuracy or reliability of the information changes. In a final section, we argue that aspects of our analysis may be useful for providing a positive theory for the rapidity of price adjustments in a securities market.