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Information Aggregation and the Cognitive Make-up of Market Participants

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  • Brice Corgnet

    (EM - EMLyon Business School)

  • Mark Desantis
  • David Porter

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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  • Brice Corgnet & Mark Desantis & David Porter, 2021. "Information Aggregation and the Cognitive Make-up of Market Participants," Post-Print hal-03188235, HAL.
    • Handle: RePEc:hal:journl:hal-03188235
    Note: View the original document on HAL open archive server: https://hal.science/hal-03188235
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    Cited by:

    1. 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.
    2. Steven Tucker & Yilong Xu, 2024. "Nonspeculative Bubbles Revisited," Working Papers in Economics 24/01, University of Waikato.
    3. Brice Corgnet & Cary Deck & Mark DeSantis & Kyle Hampton & Erik O. Kimbrough, 2023. "When Do Security Markets Aggregate Dispersed Information?," Management Science, INFORMS, vol. 69(6), pages 3697-3729, June.
    4. 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.
    5. Bao, Te & Füllbrunn, Sascha & Pei, Jiaoying & Zong, Jichuan, 2024. "Reading the market? Expectation coordination and theory of mind," Journal of Economic Behavior & Organization, Elsevier, vol. 219(C), pages 510-527.

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    Keywords

    Information aggregation; cognitive reflection; Experimental asset markets; behavioral finance;
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