A STUDY WAS CONDUCTED ON THE OPERATION OF THE PRICE SYSTEM AS AN AGGREGATOR OF THE DIFFERENT PIECES OF INFORMATION WHERE THERE ARE MANY TYPES OF INFORMED TRADERS. IT WAS CONCLUDED THAT, IN AN ECONOMY WITH COMPLETE MARKETS, THE PRICE SYSTEM DOES ACT IN SUCH A WAY THAT INDIVIDUALS, OBSERVING ONLY PRICES AND ACTING IN SELF-INTEREST, GENERATE ALLOCATIONS WHICH ARE EFFICIENT. HOWEVER, SUCH ECONOMIES NEED NOT BE STABLE BECAUSE PRICES ARE REVEALING SO MUCH INFORMATION THAT INCENTIVES FOR THE COLLECTION OF INFORMATION ARE REMOVED. THE PRICE SYSTEM CAN BE MAINTAINED ONLY WHEN IT IS NOISY ENOUGH SO THAT TRADERS WHO COLLECT INFORMATION CAN HIDE THAT INFORMATION FROM OTHER TRADERS. WHEN THIS OCCURS, SOME TRADERS WANT VERY MUCH TO KNOW, FOR EXAMPLE, WHY PRICES ARE USUALLY HIGH. IT IS NOT ENOUGH FOR TRADERS TO OBSERVE ONLY PRICES. REFERENCES.
Full text: The Journal of Finance, MAY 1976
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