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Information aggregation and the cognitive make-up of market participants

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  • Corgnet, Brice
  • DeSantis, Mark
  • Porter, David

Abstract

We assess the effect of the cognitive make-up of market participants on the informational efficiency of markets. We put forth that cognitive skills, such as cognitive reflection, are crucial for ensuring the informational efficiency of markets because they endow participants with the ability to infer others’ information from prices. Using laboratory experiments, we show that information aggregation is significantly enhanced when (i) all participants possess high levels of cognitive sophistication and (ii) this high level of cognitive sophistication is common information for all participants. Our findings shed light on the cognitive and informational constraints underlying the efficient market hypothesis.

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  • Corgnet, Brice & DeSantis, Mark & Porter, David, 2021. "Information aggregation and the cognitive make-up of market participants," European Economic Review, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:eecrev:v:133:y:2021:i:c:s0014292121000209
    DOI: 10.1016/j.euroecorev.2021.103667
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    2. Ciril Bosch-Rosa & Brice Corgnet, 2022. "Cognitive finance," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 7, pages 73-88, Edward Elgar Publishing.
    3. Brice Corgnet & Cary Deck & Mark DeSantis & David Porter, 2022. "Forecasting Skills in Experimental Markets: Illusion or Reality?," Management Science, INFORMS, vol. 68(7), pages 5216-5232, July.
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    5. Steven Tucker & Yilong Xu, 2024. "Nonspeculative Bubbles Revisited," Working Papers in Economics 24/01, University of Waikato.

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