Updating Awareness and Information Aggregation
B.E. Journal of Theoretical Economics
21 Pages Posted: 6 Jan 2019 Last revised: 2 Oct 2020
Date Written: May 14, 2020
Abstract
The ability of markets to aggregate information through prices is examined in a dynamic environment with unawareness. We find that if all traders are able to minimally update their awareness when they observe a price that is counterfactual to their private information, they will eventually reach an agreement, thus generalising the result of Geanakoplos and Polemarchakis [1982]. Moreover, if the traded security is separable, then agreement is on the correct price and there is information aggregation, thus generalizing the result of Ostrovsky [2012] for non-strategic traders. We find that a trader increases her awareness if and only if she is able to become aware of something that other traders are already aware of and, under a mild condition, never becomes aware of anything more. In other words, agreement is more the result of understanding each other, rather than being unboundedly sophisticated.
Keywords: Agreement, Information Aggregation, Unawareness, Financial Markets, Information Markets, Prediction Markets
JEL Classification: D80, D82, D83, D84, G14, G41
Suggested Citation: Suggested Citation