Trading Complex Risks

Résumé

This paper studies how complexity impacts markets’ ability to aggregate information and distribute risks. I amend fundamental asset pricing theory to reflect agents’ imperfect knowledge about complex dividend distributions and test its clear-cut predictions in the laboratory. Market equilibria corroborate complexity-averse trading behavior. Despite being overpriced, markets efficiently share complex risks between buyers and sellers. While complexity induces noise in individual trading decisions, market outcomes remain theory-consistent. This striking feature reconciles with a random choice model, where bounds on rationality are reinforced by complexity. By adjusting for estimation biases, traders reduce the variation in market-clearing prices of complex risks.