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How psychological framing affects economic market prices in the lab and field

Sonnemann, Ulrich and Camerer, Colin F. and Fox, Craig R. and Langer, Thomas (2013) How psychological framing affects economic market prices in the lab and field. Proceedings of the National Academy of Sciences of the United States of America, 110 (29). pp. 11779-11784. ISSN 0027-8424. PMCID PMC3718178. https://resolver.caltech.edu/CaltechAUTHORS:20130903-101755538

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Abstract

A fundamental debate in social sciences concerns how individual judgments and choices, resulting from psychological mechanisms, are manifested in collective economic behavior. Economists emphasize the capacity of markets to aggregate information distributed among traders into rational equilibrium prices. However, psychologists have identified pervasive and systematic biases in individual judgment that they generally assume will affect collective behavior. In particular, recent studies have found that judged likelihoods of possible events vary systematically with the way the entire event space is partitioned, with probabilities of each of N partitioned events biased toward 1/N. Thus, combining events into a common partition lowers perceived probability, and unpacking events into separate partitions increases their perceived probability. We look for evidence of such bias in various prediction markets, in which prices can be interpreted as probabilities of upcoming events. In two highly controlled experimental studies, we find clear evidence of partition dependence in a 2-h laboratory experiment and a field experiment on National Basketball Association (NBA) and Federation Internationale de Football Association (FIFA World Cup) sports events spanning several weeks. We also find evidence consistent with partition dependence in nonexperimental field data from prediction markets for economic derivatives (guessing the values of important macroeconomic statistics) and horse races. Results in any one of the studies might be explained by a specialized alternative theory, but no alternative theories can explain the results of all four studies. We conclude that psychological biases in individual judgment can affect market prices, and understanding those effects requires combining a variety of methods from psychology and economics.


Item Type:Article
Related URLs:
URLURL TypeDescription
http://dx.doi.org/10.1073/pnas.1206326110 DOIArticle
http://www.pnas.org/content/110/29/11779PublisherArticle
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3718178/PubMed CentralArticle
ORCID:
AuthorORCID
Camerer, Colin F.0000-0003-4049-1871
Additional Information:© 2013 National Academy of Sciences. Edited by Jose A. Scheinkman, Princeton University, Princeton, NJ, and approved May 17, 2013 (received for review April 17, 2012). Published online before print July 1, 2013. This research was supported by the Deutsche Forschungsgemeinschaft Grant LA1316/3-1, National Science Foundation (NSF) Grant SES-00-99209 (to C.R.F.), and The Betty and Gordon Moore Foundation, NSF–Human and Social Dynamics, and Human Frontier Science Program grants (to C.F.C.). Author contributions: U.S., C.F.C., C.R.F., and T.L. designed research; U.S. and T.L. performed research; U.S., C.F.C., C.R.F., and T.L. contributed new reagents/analytic tools; U.S. and T.L. analyzed data; and U.S., C.F.C., C.R.F., and T.L. wrote the paper.
Funders:
Funding AgencyGrant Number
Deutsche Forschungsgemeinschaft (DFG)LA1316/3-1
NSFSES-00-99209
Gordon and Betty Moore FoundationUNSPECIFIED
Human Frontier Science ProgramUNSPECIFIED
Subject Keywords:behavioral economics; judgment bias
Issue or Number:29
PubMed Central ID:PMC3718178
Record Number:CaltechAUTHORS:20130903-101755538
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20130903-101755538
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:41050
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:17 Sep 2013 20:22
Last Modified:03 Oct 2019 05:45

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