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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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Author Info

  • 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. 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.
    2. Kuhnen, Camelia M., 2012. "Asymmetric learning from financial information," MPRA Paper 39412, University Library of Munich, Germany.
    3. Baratgin, Jean, 2009. "Updating our beliefs about inconsistency: The Monty-Hall case," Mathematical Social Sciences, Elsevier, vol. 57(1), pages 67-95, January.
    4. Siddiqi, Hammad, 2011. "Thinking by analogy, systematic risk, and option prices," MPRA Paper 31316, University Library of Munich, Germany.
    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. Benjamin Enke & Florian Zimmermann, 2013. "Correlation Neglect in Belief Formation," CESifo Working Paper Series 4483, CESifo Group Munich.
    7. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2010. "Ambiguity in Asset Markets: Theory and Experiment," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1325-1359, April.
    8. Siddiqi, Hammad, 2013. "Mental Accounting: A Closed-Form Alternative to the Black Scholes Model," MPRA Paper 50759, University Library of Munich, Germany.
    9. Siddiqi, Hammad, 2013. "Analogy Making, Option Prices, and Implied Volatility," MPRA Paper 48862, University Library of Munich, Germany.
    10. 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.

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