Clarity Trumps Content: An Experiment on Information Acquisition in Beauty Contests

63 Pages Posted: 30 Mar 2018

See all articles by Sanjay Banerjee

Sanjay Banerjee

University of Alberta - Department of Accounting, Operations & Information Systems

Hong Qu

Kennesaw State University - Michael J. Coles College of Business

Ran Zhao

Chapman University

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2018

Abstract

We provide experimental evidence that under strong beauty contest incentives, players ignore signals from an information source with high content if the source has low clarity. Instead, they acquire equally costly signals from a source with higher clarity despite its lower content. Content measures how precisely an information source identifi es an economic situation, whereas clarity measures how precisely the source content is commonly interpreted. Low clarity impairs players' ability to coordinate. When signals are provided exogenously, our experimental results are less severe than theoretical predictions, but consistent with level-2 reasoning in a cognitive behavioral model. When players acquire signals endogenously, ignoring a high-content source is more severe than theoretical predictions. Our results imply that when beauty contest incentives are strong (e.g., short-horizon trading), investors can completely ignore a firm's disclosure, despite its high content, if the disclosure is not sufficiently clear.

Suggested Citation

Banerjee, Sanjay and Qu, Hong and Zhao, Ran, Clarity Trumps Content: An Experiment on Information Acquisition in Beauty Contests (March 15, 2018). University of Alberta School of Business Research Paper No. 2018-303. Available at SSRN: https://ssrn.com/abstract=3152537 or http://dx.doi.org/10.2139/ssrn.3152537

Sanjay Banerjee

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

Hong Qu

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

HOME PAGE: http://https://works.bepress.com/hong-qu/

Ran Zhao (Contact Author)

Chapman University ( email )

Orange, CA 92866
United States

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