Information Aggregation Under Ambiguity: Theory and Experimental Evidence

Review of Economic Studies, forthcoming

63 Pages Posted: 15 Jun 2018 Last revised: 26 Jan 2024

See all articles by Spyros Galanis

Spyros Galanis

Durham University

Christos A. Ioannou

Centre d’Économie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne

Stelios Kotronis

Durham University

Date Written: January 15, 2024

Abstract

We study information aggregation in a dynamic trading model. We show theoretically that separable securities, introduced by Ostrovsky (2012) in the context of Expected Utility, no longer aggregate information if some traders have imprecise beliefs and are ambiguity averse. Moreover, these securities are prone to manipulation as the degree of information aggregation can be influenced by the initial price set by the uninformed market maker. These observations are also confirmed in our laboratory experiment using prediction markets. We define a new class of strongly separable securities, which are robust to the above considerations, and show that they characterize information aggregation in both strategic and non-strategic environments. We derive several testable predictions, which we are able to confirm in the laboratory. Finally, we show theoretically that strongly separable securities are both sufficient and necessary for information aggregation but, strikingly, there does not exist a security that is strongly separable for all information structures.

Keywords: Information Aggregation, Ambiguity Aversion, Financial Markets, Information Markets, Prediction Markets

JEL Classification: D82, D83, D84, G14, G41

Suggested Citation

Galanis, Spyros and Ioannou, Christos A. and Kotronis, Stelios, Information Aggregation Under Ambiguity: Theory and Experimental Evidence (January 15, 2024). Review of Economic Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3187678 or http://dx.doi.org/10.2139/ssrn.3187678

Spyros Galanis (Contact Author)

Durham University ( email )

Durham, DH1 3LE
Great Britain

Christos A. Ioannou

Centre d’Économie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne ( email )

Paris
France

Stelios Kotronis

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

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