Information Aggregation with Heterogeneous Traders

The efficient market hypothesis predicts that asset prices reflect all available information. Recent experimental work found the rational expectation model to outperform the prior information model in contingent claim markets when traders hold homogeneous values, despite the no trade equilibrium. However, recent experiments have demonstrated the inability of contingent claim markets to successfully aggregate information when traders hold highly differentiated asset values. These prior findings beg the question of whether homogeneous values are a necessary condition for efficient market outcomes in contingent claim markets. This paper shows that homogeneous values are not a necessary condition for information aggregation and that when traders have similar, but heterogeneous values, there is robust support for the rational expectations model