The Value of Information in Markets with Heterogeneously Informed Traders - a Simulation and an Experimental Approach

26 Pages Posted: 28 May 2004

See all articles by Juergen Huber

Juergen Huber

University of Innsbruck; University of Vienna - Department of Finance

Michael Kirchler

University of Innsbruck

Abstract

Everybody is talking about the 'information society' we live in, but rarely does anybody ask how valuable information actually is. Especially in financial markets, information is often seen as the only ingredient to success. With a simulation study and an experimental market, we explore how valuable information in a (virtual) market context is. While earlier work in this field covered this question with only two levels of information, we use ten different levels to control carefully for the influence of additional information on performance in a financial market. We find that additional information is mostly useless and sometimes even harmful for low and medium informed investors, while very good investors can profit from their information.

The second focus of the paper is to explore the usefulness of different trading strategies in this market. We compare active information processing (fundamental analysis) with a random strategy. Here we find that different information levels should use differing strategies, in particular the less informed should trade randomly, while the better informed should make use of their information. The logical consequence is that there is no single optimal strategy.

Keywords: Value of information, Experimental Economics, Trading strategies, Information asymmetries

Suggested Citation

Huber, Juergen and Kirchler, Michael, The Value of Information in Markets with Heterogeneously Informed Traders - a Simulation and an Experimental Approach. EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=499484 or http://dx.doi.org/10.2139/ssrn.499484

Juergen Huber (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

University of Vienna - Department of Finance ( email )

Bruenner Strasse 72
Vienna, 1210
Austria

Michael Kirchler

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

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