An Experimental Analysis of Information Acquisition in Prediction Markets

45 Pages Posted: 2 Mar 2015 Last revised: 19 Mar 2017

See all articles by Lionel Page

Lionel Page

Queensland University of Technology

Christoph Siemroth

University of Essex - Department of Economics

Date Written: November 28, 2015

Abstract

We study which factors in terms of trading environment and trader characteristics determine individual information acquisition in experimental asset markets. Traders with larger endowments, existing inconclusive information, lower risk aversion, and less experience in financial markets tend to acquire more information. Overall, we find that traders overacquire information, so that informed traders on average obtain negative profits net of information costs. Information acquisition and the associated losses do not diminish over time. This overacquisition phenomenon is inconsistent with predictions of rational expectations equilibrium, and we argue it resembles the overdissipation results from the contest literature. We find that more acquired information in the market leads to smaller differences between fundamental asset values and prices. Thus, the overacquisition phenomenon is a novel explanation for the high forecasting accuracy of prediction markets.

Keywords: Asymmetric Information, Experimental Asset Markets, Information Acquisition, Prediction Markets

JEL Classification: C92, D82, D84, G10

Suggested Citation

Page, Lionel and Siemroth, Christoph, An Experimental Analysis of Information Acquisition in Prediction Markets (November 28, 2015). Games and Economic Behavior, Vol. 101, 354-378, 2017.. Available at SSRN: https://ssrn.com/abstract=2571710 or http://dx.doi.org/10.2139/ssrn.2571710

Lionel Page

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Christoph Siemroth (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

HOME PAGE: http://sites.google.com/site/csiemroth/

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