Does Caution Cause Aversion to Trading? Evidence from Repeated Markets with Symmetric and Asymmetric Information∗

This paper reports an experiment in which subjects buy and sell lotteries in repeated markets under symmetric and asymmetric information. In the markets with asymmetric information a minority of the subjects, the informed, were given extra information about the lottery’s payout, so had an informational advantage over the majority, the uninformed. In the markets with symmetric information none of the subjects had an informational advantage. Standard economic theory predicts there will be a gap between buying and selling prices under asymmetric information but no gap under symmetric information. Experimental and field evidence reported in the literature suggests a gap often occurs under symmetric information, but some experimental studies find that the gap decays in repeated markets. The novel feature of the experiment reported in this paper is that behaviour in repeated markets with symmetric and asymmetric information is compared. A gap between buying and selling prices decays under symmetric information but persists under asymmetric information. Furthermore, there are spillover effects. When the regime switches between symmetric and asymmetric information, subjects do not immediately adjust their behaviour. The results are interpreted as evidence that behaviour is driven by heuristics. If this interpretation is right, then the use of heuristics could also explain the gap between buying and selling prices that has been reported in other studies. JEL classication: D4, D81, D82.