Informational Price Cascades and Non-Aggregation of Asymmetric Information in Experimental Asset Markets

Abstract

We report on experimental markets which generate an abject failure of the aggregation of asymmetric information. While realized prices have zero correlation with fundamental values, surprisingly, these are not highly volatile. The non-aggregation of information manifests as prices which lock into home grown norms that we call informational price cascades. Our results are in stark contrast to previous experiments testing fully revealing rational expectations equilibrium under asymmetric information and others examining social learning in asset markets when there is a rational market maker. Our experiments incorporate the asset and information structures from the latter into the decentralized private information setting and double auction trading mechanism of the former. Information only starts to aggregate when either each private signal is revealed to half of the traders, or all private signals are simultaneously released early in the asset’s issue.

Keywords: Information cascade, information aggregation, experiment, asset market

JEL Classification: C92, D82, G12