Learning from Prices in Models of Higher Order Beliefs

This experiment examines forecasting behavior under varying information conditions to assess the extent to which traders in asset markets incorporate information in prices to resolve fundamental certainty and to resolve higher-order uncertainty. Fundamental uncertainty refers to a trader’s uncertainty about fundamental value of the asset while higher-order uncertainty refers to uncertainty about the beliefs of other traders about fundamental value of the asset. Such higher-order uncertainty is at the core of a large stream of more recent theoretical literature looking at information and price anomalies in asset markets. I find strong evidence that in an experimental asset market where higher-order beliefs play a role, subjects do not fully impound the information contained in prices to resolve either of the two uncertainties. However, in so far as resolving the higher-order uncertainty is concerned, they seem to better impound the information contained in other publicly available pieces of information.Keywords