IDEAS home Printed from https://ideas.repec.org/p/rco/dpaper/66.html
   My bibliography  Save this paper

Learning From Unrealized versus Realized Prices

Author

Listed:
  • Ngangoue, M. Kathleen

    (New York University)

  • Weizsäcker, Georg

    (Humboldt University Berlin)

Abstract

Our experiments investigate the extent to which traders learn from the price, differentiating between situations where orders are submitted before versus after the price has realized. In simultaneous markets with bids that are conditional on the price, traders neglect the information conveyed by the hypothetical value of the price. In sequential markets where the price is known prior to the bid submission, traders react to price to an extent that is roughly consistent with the benchmark theory. The difference\'s robustness to a number of variations provides insights about the drivers of this effect.

Suggested Citation

  • Ngangoue, M. Kathleen & Weizsäcker, Georg, 2018. "Learning From Unrealized versus Realized Prices," Rationality and Competition Discussion Paper Series 66, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:66
    as

    Download full text from publisher

    File URL: https://rationality-and-competition.de/wp-content/uploads/discussion_paper/66.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Max H. Bazerman & William F. Samuelson, 1983. "I Won the Auction But Don't Want the Prize," Journal of Conflict Resolution, Peace Science Society (International), vol. 27(4), pages 618-634, December.
    2. Kagel, John H, et al, 1989. "First-Price Common Value Auctions: Bidder Behavior and the "Winner's Curse."," Economic Inquiry, Western Economic Association International, vol. 27(2), pages 241-258, April.
    3. Carrillo, Juan D. & Palfrey, Thomas R., 2011. "No trade," Games and Economic Behavior, Elsevier, vol. 71(1), pages 66-87, January.
    4. Schnitzlein, Charles R, 1996. "Call and Continuous Trading Mechanisms under Asymmetric Information: An Experimental Investigation," Journal of Finance, American Finance Association, vol. 51(2), pages 613-636, June.
    5. Erik Eyster & Matthew Rabin, 2005. "Cursed Equilibrium," Econometrica, Econometric Society, vol. 73(5), pages 1623-1672, September.
    6. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
    7. Theissen, Erik, 2000. "Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets," Journal of Financial Markets, Elsevier, vol. 3(4), pages 333-363, November.
    8. Erik Eyster & Matthew Rabin & Dimitri Vayanos, 2019. "Financial Markets Where Traders Neglect the Informational Content of Prices," Journal of Finance, American Finance Association, vol. 74(1), pages 371-399, February.
    9. Amihud, Yakov & Mendelson, Haim & Lauterbach, Beni, 1997. "Market microstructure and securities values: Evidence from the Tel Aviv Stock Exchange," Journal of Financial Economics, Elsevier, vol. 45(3), pages 365-390, September.
    10. Brown, David P & Zhang, Zhi Ming, 1997. "Market Orders and Market Efficiency," Journal of Finance, American Finance Association, vol. 52(1), pages 277-308, March.
    11. de Jong,Frank & Rindi,Barbara, 2009. "The Microstructure of Financial Markets," Cambridge Books, Cambridge University Press, number 9780521867849, September.
    12. Levin, Dan & Kagel, John H & Richard, Jean-Francois, 1996. "Revenue Effects and Information Processing in English Common Value Auctions," American Economic Review, American Economic Association, vol. 86(3), pages 442-460, June.
    13. Asen Ivanov & Dan Levin & Muriel Niederle, 2010. "Can Relaxation of Beliefs Rationalize the Winner's Curse?: An Experimental Study," Econometrica, Econometric Society, vol. 78(4), pages 1435-1452, July.
    14. Grether, David M., 1992. "Testing bayes rule and the representativeness heuristic: Some experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 31-57, January.
    15. Madhavan, Ananth, 1992. "Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    16. Gary Charness & Dan Levin, 2009. "The Origin of the Winner's Curse: A Laboratory Study," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 207-236, February.
    17. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    18. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    19. Kagel, John H. & Levin, Dan, 1986. "The Winner's Curse and Public Information in Common Value Auctions," American Economic Review, American Economic Association, vol. 76(5), pages 894-920, December.
    20. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    21. Pagano, Marco & Roell, Ailsa, 1996. "Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    22. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    23. Katya Malinova & Andreas Park, 2009. "Liquidity, Volume, and Price Behavior: The Impact of Order vs. Quote Based Trading," Working Papers tecipa-358, University of Toronto, Department of Economics.
    24. Malinova, Katya & Park, Andreas, 2013. "Liquidity, volume and price efficiency: The impact of order vs. quote driven trading," Journal of Financial Markets, Elsevier, vol. 16(1), pages 104-126.
    25. Ignacio Esponda Jr. & Emanuel Vespa Jr., 2014. "Hypothetical Thinking and Information Extraction in the Laboratory," American Economic Journal: Microeconomics, American Economic Association, vol. 6(4), pages 180-202, November.
    26. Comerton-Forde, Carole & Malinova, Katya & Park, Andreas, 2018. "Regulating dark trading: Order flow segmentation and market quality," Journal of Financial Economics, Elsevier, vol. 130(2), pages 347-366.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hitoshi Matsushima, 2017. "Framing Game Theory," CARF F-Series CARF-F-425, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. André Schmelzer, 2018. "Strategy-Proofness of Stochastic Assignment Mechanisms," The Journal of Mechanism and Institution Design, Society for the Promotion of Mechanism and Institution Design, University of York, vol. 3(1), pages 17-50, December.
    3. Esponda, Ignacio & Vespa, Emanuel & Yuksel, Sevgi, 2024. "Mental Models and Learning: The Case of Base-Rate Neglect," University of California at San Diego, Economics Working Paper Series qt8cb387t8, Department of Economics, UC San Diego.
    4. Darius Schlangenotto & Wendelin Schnedler & Radovan Vadovič, 2020. "Against All Odds: Tentative Steps toward Efficient Information Sharing in Groups," Games, MDPI, vol. 11(3), pages 1-24, August.
    5. Shengwu Li, 2017. "Obviously Strategy-Proof Mechanisms," American Economic Review, American Economic Association, vol. 107(11), pages 3257-3287, November.
    6. Wenner, Lukas M., 2018. "Do sellers exploit biased beliefs of buyers? An experiment," Games and Economic Behavior, Elsevier, vol. 110(C), pages 194-215.
    7. Kai Barron & Steffen Huck & Philippe Jehiel, 2024. "Everyday Econometricians: Selection Neglect and Overoptimism When Learning from Others," American Economic Journal: Microeconomics, American Economic Association, vol. 16(3), pages 162-198, August.
    8. Moser, Johannes, 2018. "Hypothetical thinking and the winner's curse: An experimental investigation," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181506, Verein für Socialpolitik / German Economic Association.
    9. Antonio Filippin & Marco Mantovani, 2023. "Risk aversion and information aggregation in binary‐asset markets," Quantitative Economics, Econometric Society, vol. 14(2), pages 753-798, May.
    10. Evan M. Calford & Timothy N. Cason, 2024. "Contingent Reasoning and Dynamic Public Goods Provision," American Economic Journal: Microeconomics, American Economic Association, vol. 16(2), pages 236-266, May.
    11. Theo Offerman & Giorgia Romagnoli & Andreas Ziegler, 2022. "Why are open ascending auctions popular? The role of information aggregation and behavioral biases," Quantitative Economics, Econometric Society, vol. 13(2), pages 787-823, May.
    12. Johannes Moser, 2017. "Hypothetical thinking and the winner's curse: An experimental investigation," Working Papers 176, Bavarian Graduate Program in Economics (BGPE).
    13. Anderson, David M. & Hoagland, Alex & Zhu, Ed, 2024. "Medical bill shock and imperfect moral hazard," Journal of Public Economics, Elsevier, vol. 236(C).
    14. Moser, Johannes, 2017. "Hypothetical thinking and the winner's curse: An experimental investigation," University of Regensburg Working Papers in Business, Economics and Management Information Systems 36304, University of Regensburg, Department of Economics.
    15. Antonio, Filippin & Marco, Mantovani, 2019. "Risk Aversion and Information Aggregation in Asset Markets," Working Papers 404, University of Milano-Bicocca, Department of Economics, revised Apr 2019.
    16. Koch, Christian & Penczynski, Stefan P., 2018. "The winner's curse: Conditional reasoning and belief formation," Journal of Economic Theory, Elsevier, vol. 174(C), pages 57-102.
    17. Louis Golowich & Shengwu Li, 2021. "On the Computational Properties of Obviously Strategy-Proof Mechanisms," Papers 2101.05149, arXiv.org, revised Oct 2022.
    18. Marco Mantovani & Antonio Filippin, 2024. "When do prediction markets return average beliefs? Experimental evidence," Working Papers 532, University of Milano-Bicocca, Department of Economics.
    19. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2019. "Does response time predict withdrawal decisions? Lessons from a bank-run experiment," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 12(3), pages 200-222, November.
    20. Niederle, Muriel & Vespa, Emanuel, 2023. "Cognitive Limitations: Failures of Contingent Thinking," University of California at San Diego, Economics Working Paper Series qt5q14p1np, Department of Economics, UC San Diego.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Johannes Moser, 2017. "Hypothetical thinking and the winner's curse: An experimental investigation," Working Papers 176, Bavarian Graduate Program in Economics (BGPE).
    2. Moser, Johannes, 2017. "Hypothetical thinking and the winner's curse: An experimental investigation," University of Regensburg Working Papers in Business, Economics and Management Information Systems 36304, University of Regensburg, Department of Economics.
    3. Koch, Christian & Penczynski, Stefan P., 2018. "The winner's curse: Conditional reasoning and belief formation," Journal of Economic Theory, Elsevier, vol. 174(C), pages 57-102.
    4. Moser, Johannes, 2018. "Hypothetical thinking and the winner's curse: An experimental investigation," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181506, Verein für Socialpolitik / German Economic Association.
    5. Johannes Moser, 2019. "Hypothetical thinking and the winner’s curse: an experimental investigation," Theory and Decision, Springer, vol. 87(1), pages 17-56, July.
    6. Camerer, Colin & Nunnari, Salvatore & Palfrey, Thomas R., 2016. "Quantal response and nonequilibrium beliefs explain overbidding in maximum-value auctions," Games and Economic Behavior, Elsevier, vol. 98(C), pages 243-263.
    7. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
    8. Gu, Gao-Feng & Ren, Fei & Ni, Xiao-Hui & Chen, Wei & Zhou, Wei-Xing, 2010. "Empirical regularities of opening call auction in Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(2), pages 278-286.
    9. Theo Offerman & Giorgia Romagnoli & Andreas Ziegler, 2022. "Why are open ascending auctions popular? The role of information aggregation and behavioral biases," Quantitative Economics, Econometric Society, vol. 13(2), pages 787-823, May.
    10. Gourieroux, Christian & Le Fol, Gaëlle, 1997. "Modes de négociation et caractéristiques de marché," CEPREMAP Working Papers (Couverture Orange) 9714, CEPREMAP.
    11. Ghadhab, Imen & Hellara, Slaheddine, 2016. "Price discovery of cross-listed firms," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 177-188.
    12. Han, Qian & Zhao, Chengzhi & Chen, Jing & Guo, Qian, 2022. "Reexamining the impact of closing call auction on market quality: A natural experiment from the Shanghai stock exchange," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    13. Brocas, Isabelle & Carrillo, Juan D. & Castro, Manuel, 2017. "Second-price common value auctions with uncertainty, private and public information: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 67(C), pages 28-40.
    14. Juan C. Reboredo, 2012. "The switch from continuous to call auction trading in response to a large intraday price movement," Applied Economics, Taylor & Francis Journals, vol. 44(8), pages 945-967, March.
    15. Weiyu Kuo & Yu‐Ching Li, 2011. "Trading Mechanisms and Market Quality: Call Markets versus Continuous Auction Markets," International Review of Finance, International Review of Finance Ltd., vol. 11(4), pages 417-444, December.
    16. repec:grz:wpsses:2012-01 is not listed on IDEAS
    17. Jiayi Li & Sumei Luo & Guangyou Zhou, 2021. "Call auction, continuous trading and closing price formation," Quantitative Finance, Taylor & Francis Journals, vol. 21(6), pages 1037-1065, June.
    18. Rosita P. Chang & Shuh‐Tzy Hsu & Nai‐Kuan Huang & S. Ghon Rhee, 1999. "The Effects of Trading Methods on Volatility and Liquidity: Evidence from the Taiwan Stock Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(1‐2), pages 137-170, January.
    19. Goeree, Jacob K. & Offerman, Theo, 2003. "Winner's curse without overbidding," European Economic Review, Elsevier, vol. 47(4), pages 625-644, August.
    20. Theo Offerman, 2002. "Efficiency in Auctions with Private and Common Values: An Experimental Study," American Economic Review, American Economic Association, vol. 92(3), pages 625-643, June.
    21. Bendoly, Elliot & van Wezel, Wout & Bachrach, Daniel G. (ed.), 2015. "The Handbook of Behavioral Operations Management: Social and Psychological Dynamics in Production and Service Settings," OUP Catalogue, Oxford University Press, number 9780199357222.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rco:dpaper:66. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Viviana Lalli (email available below). General contact details of provider: https://rationality-and-competition.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.