Asset Prices and Informed Traders’ Abilities: Evidence from Experimental Asset Markets

Lucy F. Ackert, Bryan K. Church, and Ping Zhang
Working Paper 2002-26
December 2002

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This study reports the results of fifteen experimental asset markets designed to investigate the effects of forecasts on market prices, traders’ abilities to assess asset value, and the link between the two. Across the fifteen markets, the authors investigate alternative forecast-generating processes. In some markets the process produces an unbiased estimate of asset value and in others a biased estimate. The processes generating the biased forecasts, though, are less variable than the process generating the unbiased forecast. The authors find that, in general, period-end asset price reflects private forecasts, regardless of the forecast-generating process. Subsequently, they investigate whether traders’ abilities to use forecasts differ across the forecast-generating processes. The authors find that most are able to properly use unbiased forecasts. They refer to them as smart traders. By comparison, a significant proportion is unable to properly use biased forecasts (typically traders’ adjustments for bias are insufficient). Linking market outcomes and traders’ abilities, the authors find that asset price appears to properly reflect unbiased forecasts as long as the market includes at least two smart informed traders who have sufficient ability to influence market outcomes. To obtain a comparable result in markets with the biased forecast, at least three smart informed traders with sufficient ability to influence market outcomes are necessary.

JEL classification: D82

Keywords: forecast bias, experimental markets, smart traders

The authors acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada, the Federal Reserve Bank of Atlanta, and Georgia Tech and the helpful comments of two anonymous referees. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Lucy F. Ackert, Department of Economics and Finance, Michael J. Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, Georgia 30144, 770-423-6111,, and Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, Georgia 30309-4470; Bryan K. Church, DuPree College of Management, Georgia Tech, Atlanta, Georgia 30332-0520, 404-894-3907, fax: 404-894-6030,; or Ping Zhang, Rotman School of Management, 105 St. George Street, University of Toronto, Toronto, ON, Canada M5S 3E6,