Is the lure of choice reflected in market prices? Experimental evidence based on the 4-door Monty Hall problem
AbstractThe lure of choice is a cognitive bias with important implications for economic behavior. The question of whether this bias survives in market equilibrium is an issue that can be tackled with experimental economics methods. Here, we use the 4-door Monty Hall as a tool to measure the lure of choice both at the individual as well as the market level. We find that if individuals exhibit this bias then market prices also reflect this bias, hence, trading activity alone is not sufficient to reduce or eliminate the lure of choice. The bias, both at the individual as well as the market level, is robust to learning. If at least two traders strongly exhibit this bias, then market prices also strongly reflect this bias. This result has important implications for models with heterogeneous traders. Furthermore, the lure of choice is found to be compatible with event-style market efficiency
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Psychology.
Volume (Year): 30 (2009)
Issue (Month): 2 (April)
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Web page: http://www.elsevier.com/locate/joep
2300 Psychology of decision making Cognitive bias Aggregation of errors Lure of choice;
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- Siddiqi, Hammad, 2010. "The relevance of coarse thinking for investors' willingness to pay: An experimental study," MPRA Paper 23924, University Library of Munich, Germany.
- Siddiqi, Hammad, 2009. "Coarse Thinking and Pricing a Financial Option," MPRA Paper 21749, University Library of Munich, Germany.
- Siddiqi, Hammad, 2013. "Mental Accounting: A Closed-Form Alternative to the Black Scholes Model," MPRA Paper 50759, University Library of Munich, Germany.
- Siddiqi, Hammad, 2013. "Analogy Making, Option Prices, and Implied Volatility," MPRA Paper 48862, University Library of Munich, Germany.
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