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Do Better Informed Investors Always Do Better?

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Abstract

We investigate the value of additional, but imperfect, investment information using data from a singular source: auctions of yearling racehorses. Horse breeders possess superior information about their own horses and, in the setting we examine, have strong financial incentives to buy the best of these back at auction. Despite this, those they choose to repurchase subsequently perform significantly worse on average, earning 30% less at the racetrack than horses purchased by outsiders. This puzzling finding cannot be explained by differences in horse risk or breeder abilities, or by non-standard preferences or behavioral biases. Some weak evidence suggests that it partly reflects opportunity cost differences, but the primary puzzle remains. A little knowledge can apparently be dangerous, although the exact mechanism by which this occurs is unclear.

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  • Glenn Boyle & Gerald Ward, 2016. "Do Better Informed Investors Always Do Better?," Working Papers in Economics 16/29, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:16/29
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    File URL: https://repec.canterbury.ac.nz/cbt/econwp/1629.pdf
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    More about this item

    Keywords

    information; auctions; racehorses; IPOs;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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