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This paper provides questionnaire evidence on the role of flow analysis for professional traders and fund managers. This evidence suggests that besides fundamental information and technical analysis, the analysis of flows provides an independent third type of information for professionals. The view that flows can be used to learn about fundamentals is not consistent with the data. Instead, evidence indicates that flows more likely provide insight into semi-fundamental private information. [forthcoming JIMF 2004] JEL-Classification:

We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we re-examine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advantage of becoming informed, the costly acquisition of information, and the impossibility of having equilibrium prices with higher volatility than the underlying fundamentals.

The novel idea of setting up Internet-based virtual markets, information markets, to aggregate dispersed information and predict outcomes of uncertain future events has empirically found its way into many domains. But the theoretical examination of information markets has lagged relative to their implementation and use. This paper proposes a simple theoretical model of information markets to understand their information dynamics. We investigate and provide initial answers to a series of research questions that are important to understanding how information markets work, which are: (1) Does an information market converge to a consensus equilibrium? (2) If yes, how fast is the convergence process? (3) What is the best possible equilibrium of an information market? and (4) Is an information market guaranteed to converge to the best possible equilibrium?

It has been well-recognized that markets can aggregate less-than-perfect information across market participants. With two differently designed securities, this work examines the impact of security design on the information aggregation ability of markets in laboratory experiments. Results show that markets with one security aggregate information significantly better than markets with the other security, implying that information aggregation ability of markets is affected by the security design. Behavior of individual participants is then investigated to understand the observed market behavior. JEL Classification: C92; C91; D80

We provide an overview of recent research on belief and opinion dynamics in social networks. We discuss both Bayesian and non-Bayesian models of social learning and focus on the implications of the form of learning (e.g., Bayesian vs. non-Bayesian), the sources of information (e.g., observation vs. communication), and the structure of social networks in which individuals are situated on three key questions: (1) whether social learning will lead to consensus, i.e., to agreement among individuals starting with different views; (2) whether social learning will effectively aggregate dispersed information and thus weed out incorrect beliefs; (3) whether media sources, prominent agents, politicians and the state will be able to manipulate beliefs and spread misinformation in a society.

Sigatures are on file in the Graduate School. iii In almost all walks of life, predicting uncertain future events plays an essential role in decision-making processes. However, information related to future events frequently exists only as dispersed opinions, insights, and intuitions of individuals. Each individual only knows a little, but aggregating the dispersed information together may make considerable contribution to decision making. This is typical in many domains including business, politics, and entertainment. Therefore, how to aggregate such dispersed information for useful decision support is a crucial task. Markets have shown great potential as one of the most effective mechanisms for gathering distributed information and generating accurate forecasts, often surpassing many existing methods in practice. This research studies information markets, markets that are specially designed for information aggregation and forecasting, from four different perspectives: theoretical examination, experimental evaluation, empirical analysis, and design.

with aggregate uncertainty

Abstract: Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies under reasonable modifications for this field. An open subset of economies where none of the modified rational expectations equilibria fully reveals private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer’s utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on their location of residence. Existence of equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome. (JEL Classifications: D51; D82; R13)

At a rational expectations equilibrium (REE), individuals are assumed to know the map from states to prices. This hypothesis has two components, that agents agree (consensus), and that they have point expectations (degeneracy). We consider economies where agents ' beliefs are described by a joint distribution on states and prices, and these beliefs are ful¯lled at equilibrium. Beliefs are self-ful¯lling if every price in the support of the distribution is an equilibrium price. The corresponding equilibria are Beliefs Equilibria (BE). The further restriction that agents have the same beliefs results in Common Beliefs Equilibria (CBE). We study the relationship between BE, CBE, and REE, thus isolating the role of consensus and of degeneracy in achieving rational expectations. The ¯rst version of this paper (Dutta and Morris 1994) was prepared for the SITE Summer Workshop on \General Equilibrium under Uncertainty". We are grateful for comments from seminar participants and ¯nancial support from SITE. We have bene¯tted from discussions