Much ado about extremes: An experimental test of the shaping effect of prices on preferences

Abstract

There is evidence of a shaping effect of market prices on subjects’ evaluations in repeated private value auctions. This evidence has been traditionally interpreted as a pure behavioural phenomenon in contexts where the only available information is the market price. In this paper, we enrich the subjects’ information set by providing in treatment groups additional information on extreme asks. Our main results show a shaping effect both in the control and in the treatments and a stronger effect of the extreme information that more than halves the effect of the market price on subjects’ asks. Differently from the existing literature, we find that the provision of additional information inactivates the well‐documented tendency of the market price to fall at each auction round as a consequence of over‐asking correction. We discuss different possible mechanisms underlying this key finding.

Consciously Uncertain: A Bayesian Analysis of Preferences Formation

“…We replicate the findings of [16] by showing a stronger shaping effect of the market price on players' private evaluation in the control than in the two treatment groups. Moreover, in the treatment groups we show that extreme information has a stronger force of attraction than the market price.…”

“…However, when the item on auction has known properties but subjects are uncertain about their own evaluations, a convergence of subjects' private appraisals towards the market price is consistently observed across studies. Indeed, the market price systematically affects players' asks when unfamiliar items such as an annoying sound [12] or a disgusting liquid [7,16] is put on auction. Moreover, ref.…”

“…We faced the challenge by picking a quantile regression model to minimize outliers' influence. Just like we did in the previous paper [16], we assumed a partial adjustment model for each i-th player and estimated its reduced form as…”

“…We exploit the data of an experiment run at the Laboratory of Experimental Economics (LEE) of the University of Economics of Prague (VSE) in March 2014. While in a previous paper [16] we used these data to investigate how market prices and information about the three lowest/highest asks in a given market impact on chosen asks, here we study whether players' explicit consideration of these market signals helps explain the sign and the size of parameters governing their behavioural response.…”

Nudging to donate organs: do what you like or like what we do?

“…It is obvious that default rule nudges work only if people's revealed preferences (that is, actual choices) are context-dependent. And a large body of empirical research has repeatedly shown this to be so: people's choices reveal preferences that are shaped by seemingly irrelevant contextual market cues (Loomes et al 2003(Loomes et al , 2010Tufano 2010;Isoni et al 2016;Beraldo et al 2019). However, for the asjudged-by-themselves principle to have a meaningful normative force in the practice of nudge, this cannot be so for people's true latent preferences.…”