Market experience eliminates some anomalies—and creates new ones

Braga, Jacinto; Humphrey, Steven J.; Starmer, Chris

doi:10.1016/j.euroecorev.2008.06.005

Cited by 35 publications

(33 citation statements)

References 27 publications

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“…One relevant study, by Cox and Grether (1996), finds a reduction in the asymmetry and (to a lesser extent) frequency of preference reversals over the course of an experiment in which valuations were elicited in repeated second-price selling auctions. Braga, Humphrey and Starmer (2009) replicate this finding but also provide some reason for doubting whether market participation is the primary factor driving the decay of preference reversal 3 .…”

supporting

confidence: 67%

“…In a random kth price auction, the value of k is selected at random after bids (asks) have been stated. 9 It may nevertheless be of interest to note some existing evidence from preference reversal experiments where choices were repeated which indicates that choices were not systematically influenced by repetition (see Butler and Loomes, 2007;Braga et al, 2009). In addition, as we will explain later, we do not need to assume that, were the choice task repeated, responses would remain constant.…”

Section: Notesmentioning

confidence: 99%

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Preference reversals and disparities between willingness to pay and willingness to accept in repeated markets

Loomes

Starmer

Sugden

2010

Journal of Economic Psychology

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Plott, 1996). However, it would be premature to accept that hypothesis on the basis of existing evidence. Terms of use: Documents in EconStor mayOne reason for caution is that part of the evidence of decay effects comes from experiments featuring arbitrage operations (or 'money pumps') to impose financial losses on individuals who exhibit preference reversal (that is, their stated valuations of two alternatives imply a ranking different to that revealed in their direct choice between the same alternatives). We will argue that such transparent, individual-level arbitrage is not a normal feature of most individuals' everyday experience of markets. Hence, to discover whether actual market experience reduces the prevalence of anomalies in actual market behaviour, it is necessary to investigate the effects of experience in markets in which individual-level arbitrage does not occur.Although there is a considerable evidence of decay effects in non-arbitraged markets, most of it relates to one particular anomaly: the disparity between willingness to accept (WTA) and willingness to pay (WTP to rise with repetition, while mean and median asks in selling auctions will tend to fall.Because of this tendency, apparent decay effects could, in part at least, be artefacts of shaping.In this paper, we report an experiment which compares the effect of market experience on the WTA/WTP disparity with its effect on preference reversal. Our design allows us to distinguish between the decay of anomalies as revealed in the behaviour of individual market agents and their decay as revealed in market prices. We argue that the most credible theoretical hypothesis about the 'disciplining' effects of market experience has stronger implications for the latter kind of decay effect. By using data on market prices and on the behaviour of the 'marginal' traders whose actions determine prices, our design allows sharp tests of the market discipline hypothesis while controlling for shaping effects. The anomalies, decay effects, and shaping effectsSince Knetsch and Sinden (1984) Slovic and Lichtenstein (1968). In the classic preference reversal experiment, respondents are presented with two bets -a $ bet offering a small chance of a relatively large prize, and a P bet offering a larger chance of a smaller prize. Respondents make straight choices between the two bets, and give a certainty equivalent valuation for each of them. Preference reversal is an asymmetric inconsistency between choices a...

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confidence: 67%

Section: Notesmentioning

confidence: 99%

Preference reversals and disparities between willingness to pay and willingness to accept in repeated markets

Loomes

Starmer

Sugden

2010

Journal of Economic Psychology

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“…As Plott (1996, p. 228) says "with practice and experience, under conditions of substantial incentives, and with the accumulating information that is obtained from the process of choice (…) the final preferences show no evidence of being labile". 1 We are aware that although Plott's hypothesis is supported by some evidence there are also studies whose findings run against the idea that (market) experience is refining (Knetsch et al 2001;Loomes et al 2003;Braga et al 2009). …”

Section: The Orthodoxy: the Revealed Preference Approachmentioning

confidence: 77%

When normative and descriptive diverge: how to bridge the difference

Prades

Abellán-Perpiñán

2012

Soc Choice Welf

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Revealed preferences are not consistent. Many anomalies have been found in different contexts. This finding leads to a divergence between normative and descriptive analyses. There are several ways of facing this problem. In this paper we argue in favour of debiasing observed choices in such a way that the "true" preferences are discovered. Our procedure is based on quantitative corrections derived from assuming the descriptive validity of prospect theory and the normative validity of expected utility theory. Those corrective formulas were first applied by Bleichrodt et al. (Manag Sci 47:1498-1514. We explain here how such formulas can be used to avoid inefficient allocation of health care resources. This approach shares the philosophy of libertarian paternalism (LP). However, it reduces some of the potential problems of LP: the definition of error (and the need to nudge people) is more clear and objective. In this sense, it reduces the chances that the regulator tries to nudge people toward behaviour based on her preferences rather than those of the people she is nudging.

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“…Secondly, we may have found no discrimination at Smava because the platform is relatively young and lenders do not have enough ex-post evidence on borrowers' payment behavior. As documented by recent literature, market experience and especially loss experience exerts significant influence on the behavior of market participants (Braga et al 2009). Hence, it is expected that lenders will adjust their behavior if they learn from updated information that borrowers' gender affects payment behavior.…”

Section: Discussionmentioning

confidence: 99%