The Value of Information in Markets with Heterogeneously Informed Traders - a Simulation and an Experimental Approach

Everybody is talking about the 'information society' we live in, but rarely does anybody ask how valuable information actually is. Especially in financial markets, information is often seen as the only ingredient to success. With a simulation study and an experimental market, we explore how valuable information in a (virtual) market context is. While earlier work in this field covered this question with only two levels of information, we use ten different levels to control carefully for the influence of additional information on performance in a financial market. We find that additional information is mostly useless and sometimes even harmful for low and medium informed investors, while very good investors can profit from their information. The second focus of the paper is to explore the usefulness of different trading strategies in this market. We compare active information processing (fundamental analysis) with a random strategy. Here we find that different information levels should use differing strategies, in particular the less informed should trade randomly, while the better informed should make use of their information. The logical consequence is that there is no single optimal strategy