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Are Judgment Errors Reflected in Market Prices and Allocations? Experimental Evidence Based on the Monty Hall Problem

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  • Brian D. Kluger

    (University of Cincinnati)

  • Steve B. Wyatt

    (University of Cincinnati)

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    Abstract

    The question of whether individual judgment errors survive in market equilibrium is an issue that naturally lends itself to experimental analysis. Here, the Monty Hall problem is used to detect probability judgment errors both in a cohort of individuals and in a market setting. When all subjects in a cohort made probability judgment errors, market prices also reflected the error. However, competition among two bias-free subjects was sufficient to drive prices to error-free levels. Thus, heterogeneity in behavior can be an important factor in asset pricing, and further, it may take few bias-free traders to make asset prices bias-free. Copyright 2004 by The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 59 (2004)
    Issue (Month): 3 (06)
    Pages: 969-998

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    Handle: RePEc:bla:jfinan:v:59:y:2004:i:3:p:969-998

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    Cited by:
    1. Enke, Benjamin & Zimmermann, Florian, 2013. "Correlation Neglect in Belief Formation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79900, Verein für Socialpolitik / German Economic Association.
    2. Kuhnen, Camelia M., 2012. "Asymmetric learning from financial information," MPRA Paper 39412, University Library of Munich, Germany.
    3. Ackert, Lucy F. & Kluger, Brian D. & Qi, Li, 2012. "Irrationality and beliefs in a laboratory asset market: Is it me or is it you?," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 278-291.
    4. Baratgin, Jean, 2009. "Updating our beliefs about inconsistency: The Monty-Hall case," Mathematical Social Sciences, Elsevier, vol. 57(1), pages 67-95, January.
    5. Brain Kluger & Daniel Friedman, 2006. "Financial Engineering and Rationality: Experimental Evidence Based on the Monty Hall Problem," Labsi Experimental Economics Laboratory University of Siena 007, University of Siena.
    6. Siddiqi, Hammad, 2013. "Analogy Making, Option Prices, and Implied Volatility," MPRA Paper 48862, University Library of Munich, Germany.
    7. Siddiqi, Hammad, 2013. "Mental Accounting: A Closed-Form Alternative to the Black Scholes Model," MPRA Paper 50759, University Library of Munich, Germany.
    8. Siddiqi, Hammad, 2011. "Thinking by analogy, systematic risk, and option prices," MPRA Paper 31316, University Library of Munich, Germany.
    9. Elena Asparouhova & Peter Bossaerts & Jon Eguia & William Zame, 2014. "Asset Prices and Asymmetric Reasoning," Bristol Economics Discussion Papers 14/640, Department of Economics, University of Bristol, UK.
    10. Choo, Lawrence C.Y, 2014. "Trading Participation Rights to the Red Hat Puzzle. Will Markets allocate the rights for performing decision tasks to the more abled players?," MPRA Paper 55569, University Library of Munich, Germany.
    11. Lucy F. Ackert & Narat Charupat & Richard Deaves & Brian D. Kluger, 2006. "The origins of bubbles in laboratory asset markets," Working Paper 2006-06, Federal Reserve Bank of Atlanta.
    12. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2006. "Ambiguity in Asset Markets: Theory and Experiment," Carlo Alberto Notebooks 27, Collegio Carlo Alberto, revised 2009.
    13. Lawrence C. Y. Choo, 2014. "Trading Participation Rights to the “Red Hat Puzzle”. An Experiment," Discussion Papers 1408, Exeter University, Department of Economics.

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