A Quasi-Experimental Test of the Marginal Trader Hypothesis

Authors

  • Calvin Blackwell

    Associate Professor
    1. Department of Economics and Finance, College of Charleston, Charleston, SC, USA
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    • I would like to thank John Cadigan, Anthony Bishara, and participants in the 2008 Southern Economic Association Meetings and the College of Charleston Economics and Finance Seminar Series for their helpful comments. (Partial) funding for this project came from the Initiative for Public Choice & Market Process, School of Business and Economics, College of Charleston.

Summary

Economists have tried to reconcile irrational individual-level behavior with rational market behavior through the Marginal Trader Hypothesis (MTH), which posits that even when most traders act irrationally, a small group of well-informed traders can keep an asset's market price equal to its fundamental value. I test the MTH by comparing predictions for the 2008 U.S. presidential election generated by the Iowa Electronic Markets to those of a prediction contest, a decision task that precludes marginal traders. The results do not support the MTH; I find that the forecasts generated by the prediction market and the prediction contest are equally accurate.

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