Title

Informed Traders' Performance and the Information Environment: Evidence from Experimental Asset Markets

Department

Economics, Finance and Quantitative Analysis

Document Type

Article

Publication Date

10-1-2018

Abstract

We report the results of 18 experimental markets designed to investigate the effect of the information environment on informed traders' performance. In our experiment, traders bid to acquire costly, imperfect information on asset value and then take part in a double-auction asset market. We posit that the nature of the information environment, distinguished by the cost of information, affects traders’ ability to prosper. Using the inverse relationship between cost of information and number of informed traders, we study whether traders can properly determine the value of the information under enriched and impoverished environments. In our experiment, the enriched environment includes a significant number of informed traders, whereas the impoverished environment has few informed traders. We find that traders in an impoverished environment pay too much for information and, once informed, they do not transact enough to recover the cost of information acquisition. Traders who compete for information that confers a larger information advantage are worse off than those who compete in an environment in which information is more widely available.

Journal

Accounting, Organizations and Society

Journal ISSN

0361-3682

Volume

70

First Page

1

Last Page

15

Digital Object Identifier (DOI)

10.1016/j.aos.2018.04.002

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