Charles Plott

Charles Plott
California Institute of Technology | CIT · Division of the Humanities and Social Sciences

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312
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Publications

Publications (312)
Article
Full-text available
Biodiversity offset credits in New South Wales are transacted within a regulatory environment defined by complex trading rules and many different types of biodiversity credits that create thin markets and high transaction costs. This paper describes a market designed to facilitate efficient and effective transactions. The market includes a search a...
Article
Realistic, everyday rewards contain multiple components, such as taste and size. However, our reward valuations and the associated neural reward signals are single dimensional (vector to scalar transformation). Here, we present a protocol to identify these single-dimensional neural responses for multi-component choice options in humans and monkeys...
Article
Full-text available
The paper reports on the methodology, experiments, design and outcome of a large auction with multiple, interdependent markets constructed from principles of general equilibrium as opposed to game theoretic auction theory. The auction distributed 18,788 entitlements to operate electronic gaming machines in 176 interconnected markets to 363 potentia...
Article
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Previous experimental work demonstrates the power of classical theories of economic dynamics to accurately characterize equilibration in multiple market systems. Building on the literature, this study examines the behavior of experimental continuous double auction markets in convergence-challenging environments identified by Scarf (Int Econ Rev 1:1...
Article
The paper studies structural inefficiencies of administrative decisions demonstrated in an example from the growing government service sector. The provision of school transportation to disadvantaged children touches social concerns and regulations related to classical conditions of limited competition. The decision process is partitioned into key e...
Article
This article focuses on principles of information aggregation in the presence of false, public reports (fake news). The analysis explores news has been having a public goods feature characterized by models of information and economic efficiency. The analysis is not tied to any particular theory about how or why unreliable news emerges. The reports...
Article
The paper reports on the theory, design, laboratory experimental testing, field implementation and results of a large, multiple market and policy constrained auction. The auction involved the sale of 18,788 ten-year entitlements for the use of electronic gaming machines in 176 interconnected markets to 363 potential buyers representing licensed gam...
Article
This paper reports experiments motivated by ongoing controversies regarding tick size in markets. The minimum tick size in a market dictates discrete values at which bids and asks can be tendered by market participants. All transaction prices must occur at these discrete values, which are established by the rules of each exchange. The simplicity of...
Article
In 2002 Elinor Ostrom and some of her colleagues organized a working group on Testing Theoretical Models of Individual Behavior in Dynamic Social Dilemmas and held the first meeting of this group at Indiana University Bloomington in 2003. There have now been five subsequent meetings of different incarnations of this group (2006, Max Planck Institut...
Article
The two volume Oxford Handbook of Public Choice provides a comprehensive overview of the Public Choice literature. Volume 1 covers rational choice models of elections, interest groups, rent seeking, and public choice contributions to normative political economy. It begins with introductory chapters on rational choice politics, the founding of publi...
Article
The paper addresses the issue of “fake news” through a well-known and widely studied experiment that illustrates a possible science behind the phenomenon. Public news is viewed as an aggregation of decentralized pieces of valuable information about complex events. Such systems rely on accumulated investment in trust in news sources. In the case of...
Article
Full-text available
Successful field tests were conducted on two new Information Aggregation Mechanisms (IAMs). The mechanisms collected information held as intuitions about opening weekend box office revenues for movies in Australia. Participants were film school students. One mechanism is similar to parimutuel betting that produces a probability distribution over bo...
Article
This paper reports experiments motivated by ongoing controversies regarding tick size in markets. The minimum tick size in a market dictates discrete values at which bids and asks can be tendered by market participants. All transaction prices must occur at these discrete values, which are established by the rules of each exchange. The simplicity of...
Article
Full-text available
The paper develops and studies a decentralized mechanism for pricing and allocation challenges typically met with administrative processes. Traditional forms of markets are not used due to conditions associated with market failure, such as complex coordination problems, thin markets, non-convexities including and zero marginal cost due to lumpy tra...
Article
We study multiple- unit, laboratory experimental call markets in which orders are cleared by a single price at a scheduled "call." The markets are independent trading "days" with two calls each day preceded by a continuous and public order flow. Markets approach the competitive equilibrium over time. The price formation dynamics operate through the...
Article
Full-text available
A new information aggregation mechanism (IAM), developed via laboratory experimental methods, is implemented inside Intel Corporation in a long-running field test. The IAM, incorporating features of pari-mutuel betting, is uniquely designed to collect and quantize as probability distributions dispersed, subjectively held information. IAM participan...
Article
[Introduction] Systematic opportunities for manipulation emerge as a by-product of the structure of all group decision processes. Theory suggests that no process is immune. The study of manipulation provides principles and insights about how parts of complex decision systems work together and how changes in one part can have broad impact. Thus, man...
Article
Full-text available
Significance Revealed preference theory scrutinizes utility maximization based on tradeoffs between goods. This notion concerns the transition from biological rewards (necessary for survival) to tradable economic goods (beneficial for welfare and evolutionary fitness). However, these assumptions have never been tested empirically in species closely...
Article
We investigate how price ceilings and floors affect outomces in continuous time, double auction markets with discrete goods and multiple qualities. Since competitive equilibria need not exist in markets with price contols, we investigated the nature of non-price competition and how markets might evolve in its presence. We develop a quality competit...
Article
We study multiple-unit, laboratory experimental call markets in which orders are cleared by a single price at a scheduled “call”. The markets are independent trading “days” with two calls each day preceded by continuous and public order flow. Markets approach the competitive equilibrium over time. The price formation dynamics operate through the fl...
Article
The paper investigates the revenue and efficiency of different ascending price auction architectures for the sale of three items and five bidders. Four architectures are studied: two different sequences of single item auctions, simultaneous auctions with a common countdown clock, and simultaneous auctions with item specific countdown clocks. A coun...
Article
A committee of five uses majority rule for decisions on two public goods. Individual committee member preferences depend on a state of nature that is unknown to the committee members but the state of nature is known to two experts who have preferences about committee decisions. Experts have no vote on the committee but provide a recommendation to t...
Article
Field tests of a new Information Aggregation Mechanism (IAM) developed via laboratory experimental methods were implemented inside Intel Corporation for sales forecasting. The IAM, which incorporates selected features of parimutuel betting, is uniquely designed to collect and quantize as probability distributions any dispersed, subjectively held in...
Article
We investigate how price ceilings and floors affect outcomes in continuous time, double auction markets with discrete goods and multiple qualities. When price controls exist, the existence of competitive equilibria is no longer guaranteed; hence, we investigate the nature of non-price competition and how markets might evolve in its presence. We dev...
Article
The paper is an account of the development of laboratory experimental methods in the early 1970s as influenced by the fields of Public Choice and Social Choice. Just a few key experiments conducted during a period when no experimental markets research was taking place, provide a bridge with the subsequent, rapid, growth of experimental economics. A...
Article
This study explores the tension between the standard economic theory of preference and nonstandard theories of preference that are motivated by an underlying theory of framing. A simple experiment fails to measure a known preference. The divergence of the measured preference from the known preference reflects a mistake, arising from some subjects’...
Article
Full-text available
Field tests of a new Information Aggregation Mechanism (IAM) developed via laboratory experimental methods were implemented inside Intel Corporation for sales forecasting. The IAM, which incorporates selected features of parimutuel betting, is uniquely designed to collect and quantize as probability distributions any dispersed, subjectively held in...
Article
The paper reports the architecture of a continuous combinatorial auction. Preferences are based on sets of items and feasibility requires the nonintersection of sets. Countdown clocks replace eligibility and activity requirements typical of rounds-based auctions. Bids remain in the system to be combined with new bids to form winning collections. In...
Article
Full-text available
We consider a market in which traders arrive at random times, with random private values for the single-traded asset. A trader’s optimal trading decision is formulated in terms of exercising the option to trade one unit of the asset at the optimal stopping time. We solve the optimal stopping problem under the assumption that the market price follow...
Article
The paper explores organizations designed to influence a group to choose specific alternatives from a set of possible choices. The perspective is that of an administrator that has personal objectives not shared by the group and can dictate organization but not group choice. The design works through subcommittees. The variables used to manipulate th...
Article
A committee of five uses majority rule for decisions on two public goods. Individual committee member preferences depend on a state of nature that is unknown to the committee members but the state of nature is known to two experts who have preferences about committee decisions. Experts have no vote on the committee but provide a recommendation to t...
Article
The proposed 2008 TARP auction was intended to remove "toxic" assets from portfolios of financially stressed banks. The Treasury selected a design whereby bids to sell different securities would be normalized by "reference prices" that reflect relative value estimates. We conduct a series of experiments indicating that a simple Reference Price Auct...
Patent
Full-text available
A trading platform and trading method that allows access to additional pools of liquidity is described. Other embodiments are also described.
Article
Full-text available
We study consequences of regulatory interventions in limit order markets that aim at stabilizing the market after an occurrence of a “flash crash”. We use a simulation platform that creates random arrivals of trade orders, that allows us to analyze subtle theoretical features of liquidity and price variability under various market structures. The s...
Article
Prices and quantities converge to the theoretical competitive equilibria in continuous, double auction markets. The double auction is not a tatonnement mechanism. Disequilibrium trades take place. The absence of any influence of disequilibrium trades, which have the capacity to change the theoretical equilibrium, appears to be due to a property fou...
Article
This study reports a simple experiment using induced-value items to assess the accuracy of the Becker, DeGroot, Marschak (BDM) method (1964 Behavioral Science) for measuring preferences. Although the BDM mechanism is incentive compatible the data indicate that it can be empirically unreliable due to subject misconceptions about the game form. Subje...
Article
I appreciate having the opportunity to celebrate the 50th anniversary of The Calculus of Consent and to reflect on its impact on me and my research. Several of the issues that shaped my research since I was a graduate student at the University of Virginia (1962–1965) can be traced to ideas found in the Calculus of Consent and to the writings of Jam...
Article
Full-text available
We develop a quality competition model to understand how price controls affect market outcomes in buyer-seller markets with discrete goods of varying quality. While competitive equilibria do not necessarily exist in such markets when price controls are imposed, we show that stable outcomes do exist and characterize the set of stable outcomes in the...
Article
We report on the experimental results of simple auctions with (i) a median-bid pricing rule and (ii) nonbinding bids (winning bids can be withdrawn)--the two central pillars of the competitive bidding program designed by the Centers for Medicare and Medicaid Services (CMS). Comparisons between the performance of the CMS auction and the performance...
Article
Full-text available
We study the classic Gale (1963) economy using laboratory markets. Tatonnement theory predicts prices will diverge from an equitable interior equilibrium towards infinity or zero depending only on initial prices. The inequitable equilibria determined by these dynamics give all gains from exchange to one side of the market. Our results show surprisi...
Article
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We develop structural econometric tests of asset pricing theory for application to data from experimental financial markets. The tests differ from those used in the analysis of field data because they verify the consistency between prices and allocations, as opposed to merely testing whether only prices satisfy equilibrium restrictions. Our tests a...
Article
The workshop of the Association for Public Economic Theory on behavioral and experimental public economics was held at Ecole Normale Supérieure de Lyon, Université de Lyon, from June 24 to June 26, 2008. Thirty papers were presented in addition to keynotes by Charlie Plott and John List. The focus of the workshop was to test theoretical models usin...
Article
The workshop of the Association for Public Economic Theory on behavioral and experimental public economics was held at Ecole Normale Supérieure de Lyon, Université de Lyon, from June 24 to June 26, 2008. Thirty papers were presented in addition to keynotes by Charlie Plott and John List. The focus of the workshop was to test theoretical models usin...
Article
Full-text available
The proposed 2008 TARP auction was intended to facilitate rapid purchases by the U.S. department of Treasury of a wide array of mortgage-backed securities in order to remove these “toxic assets” from the portfolios of financially stressed banks. The Treasury had selected a Reference Price design whereby bids to sell different securities would be no...
Article
Full-text available
Isoni, Loomes and Sugden (2010) assert that Plott and Zeiler (2005) reported inaccurate results. Placing ILS’s selective quotes into context demonstrates otherwise. In addition, examining the data closely leads to three conclusions. First, all mug data reject endowment effect theory. Second, lottery gaps are associated with unstable attitudes towar...
Article
Full-text available
We study the effects of closing price manipulation in an experimental market to evaluate the social harm caused by manipulation. We find that manipulators, given incentives similar to many actual manipulation cases, decrease price accuracy and liquidity. The mere possibility of manipulation alters market participants' behavior, leading to reduced l...
Article
This paper reports on a large-scale field experiment testing strategies available to a seller participating in simultaneous competitive sequential ascending price automobile auctions. Every other week, the seller offered approximately 100 vehicles for sale in an auction environment in which several competing sellers offered on the order of 3000 veh...
Article
"This article demonstrates that a robust tacit collusion evolves quickly in a "collusion incubator" environment but is destroyed by the simultaneous descending price auction. Theories of collusion-producing behavior, along with the detail of the states on which strategies are conditioned, lead to a deeper understanding of how tacit collusion evolve...
Article
"The paper studies bidder behavior in simultaneous, continuous, ascending price auctions. We design and implement a "collusion incubator" environment based on a type of public, symmetrically "folded" and "item-aligned" preferences. Tacit collusion develops quickly and reliably within the environment. Once tacit collusion developed, it proved remark...
Article
Full-text available
The quadratic scoring rule (QSR) is often used to guarantee an incentive compatible elicitation of subjective probabilities over events. Experimentalists have regularly not been able to ensure that subjects fully comprehend the consequences of their actions on payoffs given the rules of the games. In this note, we present a procedure that allows th...
Article
The signatories to this document are economists who have studied telecommunications, auctions, and competition policy. While we may disagree about the stimulus package, we believe that it is important to implement mechanisms that make stimulus spending as efficient as possible. To that end, we have come together to encourage the National Telecommun...
Article
Information aggregation mechanisms (IAMs) based on parimutuel-type betting systems can aggregate information from complex environments. However, the performance of previously studied systems is imperfect due to possible bluffing, strategic timing of decisions, and “long-shot bias”. This paper demonstrates two modifications of parimutuel systems tha...
Article
The tendency of double auction markets to converge to the equilibrium of the associated competitive equilibrium model is well known, but the equilibration process is not understood. The reason for adjustment and the processes that are actively involved with the adjustment process are still a mystery. However, the study of many markets reported over...
Article
Since market equilibrium can be interpreted as a solution to a system of equations, "price discovery," as it called in the language of market makers, can be viewed as having "found" the solution. Of course the information needed to even formulate the equations does not exist in one place so the idea that markets are "searching" for the solution to...
Article
First, market prices can exhibit the type of instability predicted by classical dynamic models. Second, the conditions under which instability is observed are not captured by the cobweb model but such conditions are captured by models of the form developed by Marshall and Walras in which the market has “perversely shaped” curves, such as an upward-...
Article
The fundamental question addressed by this research is the degree to which the classical law of comparative advantage can be observed operating in experimental markets. The law holds that the local economic environments systematically influence, if not completely dictate, patterns of specialization and trade in this sense: local economies will exper...
Article
Theoretically, it is not the case that markets will necessarily equilibrate even when the equilibrium is a unique, interior equilibrium. In his example prices always orbit around the equilibrium and thus never converge. That platform thus provides the starting point of the research. For the parameters of his example, either the markets will not equ...
Article
This chapter illustrates a mechanism capable of competitively allocating power through an electricity network in which "loop flow" and the unusual economic phenomenon caused by loop flow are anticipated and integrated into the competitive process. At the base of the complexity is Kirchoff's law governing electricity flow through power grids. This p...
Article
The experimental work demonstrates that markets have the capacity to collect information through a process of equilibration and that fact suggests the feasibility of creating a system of markets that have only a purpose of gathering information. The laboratory work suggests that theory and experiments can be turned to the design and implementation...
Article
The concept of tatonnement evolved to embody a methodology for determining price – a “price discovery process” – without disequilibrium trades taking place. It has been viewed as an auctioneer calling out prices, observing behavior and calling out new prices in response to the behavior. The process is imagined as continuing until an equilibrium is...
Article
The experiments reported in this chapter explore the interaction of networks of markets. The issue is whether, and how long, “chains” of markets separated in time, space and participants might behave. The setting can be interpreted in two different ways. One is a system of vertical markets in which tiers of intermediate goods are produced as inputs...
Article
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The paper develops and analyzes an internal market based mechanism that enables a decentralized enterprise to meet the conditions of the Corporate Average Fuel Economy (CAFE) regulations. Divisions that produce vehicles with fuel economy (miles per gallon fuel) above the regulatory requirement receive Fuel Efficiency Credits (FEC). These credits ca...
Book
Experimental methods in economics respond to circumstances that are not completely dictated by accepted theory or outstanding problems. While the field of economics makes sharp distinctions and produces precise theory, the work of experimental economics sometimes appear blurred and may produce results that vary from strong support to little or part...
Article
In Victoria, Australia individuals or firms wishing to proceed with development that involves the clearing of native vegetation are required to obtain an offset to replace the vegetation destroyed. This paper focuses on the design and testing of the electronic BushBroker exchange and the evaluation of alternative market institutions, while briefly...
Article
The behavior of markets characterized by non-convexities has been the subject of debate for almost a century. Marshall, for example, thought that the existence of large economies of scale in an industry would be a sufficient condition to guarantee that with any initial competition, the industry would ultimately result in monopoly. The great discuss...
Article
This paper develops a new experimental environment for the study of markets. The period structure of classical experimental markets, which is known to play an important role in the equilibration process, is replaced by an environment, in which incentives arrive randomly and continuously throughout. The issue posed is whether classical principles of...
Article
Many tests of asset-pricing models address only the pricing predictions, but these pricing predictions rest on portfolio choice predictions that seem obviously wrong. This paper suggests a new approach to asset pricing and portfolio choices based on unobserved heterogeneity. This approach yields the standard pricing conclusions of classical models...
Article
Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. Using these markets as forecasting tools could substantially improve decision making in the private and public sectors. We argue that U.S. regulators should lower barriers to the creation and design of...
Article
Full-text available
Systematic asymmetries in exchange behavior have been widely interpreted as support for "endowment effect theory," an application of prospect theory positing that loss aversion and utility function kinks set by entitlements explain observed asymmetries. We experimentally test an alternative explanation, namely, that asymmetries are explained by cla...
Article
Full-text available
This study is the first to attempt to isolate a relationship between cognitive activity and equilibration to a Nash Equilibrium. Subjects, while undergoing fMRI scans of brain activity, participated in second price auctions against a single competitor following predetermined strategy that was unknown to the subject. For this auction there is a uniq...
Article
We study market equilibration in laboratory economies that are larger and more complex than any that have been studied experimentally to date. Complexity is derived from the fact that the economies are “international” in economic structure with multiple input, output, and foreign exchange markets in operation. The economies have twenty-one markets...
Chapter
One of the main themes that has emerged from behavioral decision research during the past three decades is the view that people's preferences are often constructed in the process of elicitation. This idea is derived from studies demonstrating that normatively equivalent methods of elicitation (e.g., choice and pricing) give rise to systematically d...
Article
Full-text available
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effect...
Article
Full-text available
The research reported here is focused on the design of new information aggregation mechanisms. These are competitive processes designed for collecting and aggregating dispersed information held in the form of impression and belief, that might otherwise be impossible to get. The research explores alternative institutional forms of IAMs and how they...
Article
Full-text available
This research is focused on the problem of congestion at locks on the inland waterways of the United States, and particularly on the Mississippi and Illinois Rivers. The current policy of first-come-first-served exacerbates the problem and adds to delays and inefficiency. An alternative policy of marketable priority access permits is proposed and s...
Article
Previous experimental work has demonstrated the power of the classical theory of economic dynamics. In particular, the models have proved to be accurate in predicting the principle directions of movement and orbit-like behavior in general equilibrium systems. Questions left open and addressed in this study are (i) do the markets necessarily converg...
Article
We report the results of experiments on economic decisions with two populations, one of healthy elderly individuals (average age 82) and one of younger students (average age 20). We examine confidence, decisions under uncertainty, differences between willingness to pay and willingness to accept and the theory of mind (strategic thinking). Our findi...
Article
The results of simple exchange experiments have been widely reported in the literature. When subjects are endowed with coffee mugs they are reluctant to exchange their mugs for pens. Alternatively, when they are endowed with pens, very few exchange the pens for mugs. These observed asymmetries in exchange behavior have been widely cited as support...
Article
We study market equilibration in laboratory economies that are larger and more complex than any that have been studied experimentally to date. Complexity is derived from the fact that the economies are international in economic structure with multiple input, output, and foreign exchange markets in operation. The economies have twenty-one markets an...
Article
This paper reports on an experimental investigation of the evolution of networks and the individual decision-making processes that guide it. Inasmuch as there is no history of experimental work on network formation, part of the paper is devoted to the formulation of problems that can be examined experimentally. The results are that networks, compos...
Article
Full-text available
Isoni, Loomes, and Sugden (2011) assert that Plott and Zeiler (2005) reported inaccurate results. Placing ILS's selective quotes into context demonstrates otherwise. Additionally, examining the data closely yields three conclusions. First, all mug data reject endowment effect theory. Second, lottery gaps are associated with unstable attitudes towar...
Article
Full-text available
Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option w...
Article
A theory advanced in regulatory hearings holds that market performance will be improved if one side of the market is forced to publicly reveal preferences. For example, wholesale electricity producers claim that retail electricity consumers would pay lower prices if wholesale public utility demand is disclosed to producers. Experimental markets stu...
Article
This paper examines how group composition affects conditional cooperation in a repeated voluntary contribution mechanism linear public good game. Identity was created using a team-building activity and subjects were assigned to groups of six consisting of a varying number of subjects from two teams. Contributions to the public good were decreasing...
Article
Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option w...
Article
Sales of multiple real-estate properties are often conducted via a sequence of ascending auctions, giving the winner at each stage the right to choose one of the available lots. We show that when bidders are risk averse, such “bidders' choice” auctions raise more revenues than standard simultaneous or sequential ascending auctions. We also report t...
Article
We develop a model of the behavior of bidders in simultaneous ascending auctions based on two principles: principle of surplus maximization and principle of bid minimization. These principles lead to models of both price dynamics and equilibration, leading to disequlibrium structural equations that can be used for estimating bidder values. The inte...
Article
Scarf (Int. Econ. Rev. 1 (1960) 157) proposed a model of dynamic adjustment in which the standard tatonnement price adjustment process orbits around, rather than converges to, the competitive equilibrium. Hirota (Int. Econ. Rev. 22 (1981) 461) characterized the price paths. We explore the predictions of Scarf's model in a non-tatonnement experiment...
Article
We report on two sets of large-scale financial markets experiments that were designed to test the central proposition of modern asset pricing theory, namely, that risk premia are solely determined by covariance with aggregate risk. We analyze the pricing within the framework suggested by two theoretical models, namely, the (general) Arrow and Debre...
Article
We report the results of experiments on economic decisions with two populations, one of healthy elderly individuals (average age 82) and one of younger students (average age 20). We examine confidence, decisions under uncertainty, differences between willingness to pay and willingness to accept and the theory of mind (strategic thinking). Our findi...
Article
Sales of multiple real-estate properties are often conducted via a sequence of ascending auctions, giving the winner at each stage the right to choose one of the available lots. We show that when bidders are risk averse, such "bidders' choice" auctions raise more revenues than standard simultaneous or sequential ascending auctions. We also report t...
Article
For centuries, villages in the Alps employed a special system for managing their common properties. Individual users could inspect other users at their own cost and impose a predetermined sanction (a fine) when a free rider was discovered. The fine was paid to the user who found a violator. Experiments with the institutions demonstrate that this m...
Article
Full-text available
The demonstrated capacity of markets to aggregate information motivates research on alternative institutions designed to do the same task. This study inquires about forms of parimutuel betting systems. Measures of information aggregation for performance evaluation are introduced. Two environments are