No-Trade in the Laboratory

We construct laboratory financial markets in which subjects can trade an asset whose value is unknown. Subjects receive private clues about the asset value and then set bid and ask prices at which they are willing to buy or to sell from the other participants. In some of our markets (experimental treatments), there are gains from trade, while in others there are no gains: trade is zero sum. Celebrated no-trade theorems state that differences in private information alone cannot explain trade in the zero sum case. We study whether purely informational trade is eliminated in our experimental markets with no gains. The comparison of our results for gains and no-gains treatments shows that subjects fail to reach the no-trade outcome by pure introspection, but they approach it over time through market feedback and learning. Furthermore, the less noisy the clue-asset relationship is, the closer trade comes to being eliminated entirely.

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