Price-Conveyed Information vs. Observed Insider Behavior: A Note on Rational Expectations Convergence

Abstract

The recent experimental results of Plott and Sunder (1982) and Friedman, Harrison and Salmon (1983) on the ability of single commodity markets to "reveal" the underlying state to initially uninformed traders were potentially influenced by a design in which the set of informed traders was held constant throughout the life of the market. Hence the performance of uninformed traders in the market might have been predicated on their knowledge of, and the observed behavior of, the informed traders. The experiment discussed below is a replication of one market in Plott and Sunder (1982), with the added feature that the traders who were to be informed of the state differed from period to period. The results are equivalent to those of Plott and Sunder (1982) in the price dynamics, while less conclusive regarding the acquisition and use of the state-price correspondence by uninformed traders.

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