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Pascal's Wager and Information

Author

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  • Michael H. Breitner
  • Christian Dunis
  • Hans-Jörg Mettenheim
  • Christopher Neely
  • Georgios Sermpinis
  • Klaus Schredelseker

Abstract

ABSTRACT Should we make financial forecasts? The usual answer looks like Pascal's wager: we don't know whether God exists; who erroneously believes loses nothing, who correctly believes wins everything; who correctly disbelieves, gains nothing, who erroneously disbelieves loses everything. Believing is thus a dominant choice. Turned to finance: markets are efficient or not. In an efficient market forecasters and non‐forecasters win nothing; in a non‐ efficient market forecasters win and non‐forecasters lose. Forecasting is rational if inefficiencies have a probability > 0. We use an agent‐based approach in studying the information value in a market with endogenous prices. We show that in inefficient markets rational traders don't make forecasts and an improvement in public information may even be harmful for the users. On average, an investor who has no information (index investor) performs like the market does; it is impossible that all others—those who know more than nothing—perform better. Pascal's wager does not apply. Copyright © 2014 John Wiley & Sons, Ltd.

Suggested Citation

  • Michael H. Breitner & Christian Dunis & Hans-Jörg Mettenheim & Christopher Neely & Georgios Sermpinis & Klaus Schredelseker, 2014. "Pascal's Wager and Information," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(6), pages 455-470, September.
    • Handle: RePEc:wly:jforec:v:33:y:2014:i:6:p:455-470
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    Cited by:

    1. Paolo Pellizzari, 2024. "Learning Whether to Be Informed in an Agent-Based Evolutionary Market Model," Working Papers 2024: 03, Department of Economics, University of Venice "Ca' Foscari".
    2. Hauser, Florian & Schredelseker, Klaus, 2018. "Who benefits from insider regulation?," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 203-210.
    3. Weissensteiner, Alex, 2019. "Correlated noise: Why passive investment might improve market efficiency," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 158-172.

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