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Do markets reveal preferences - or shape them?

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Author Info

  • Andrea Isoni

    (University of Warwick)

  • Peter Brooks

    (Barclays Wealth)

  • Graham Loomes

    (University of Warwick)

  • Robert Sugden

    (University of East Anglia)

Abstract

Standard economic analysis assumes that preferences are independent of markets. However, there is evidence suggesting that price information can influence preferences. We investigate the hypothesis that markets do not simply allow agents to reveal their preferences, but actually help to shape them. Using a demand- revealing market institution, we find strong support for this shaping hypothesis. Monetary valuations are significantly affected by price feedback and divergent price expectations. These effects are not entirely eliminated by further market experience. Our results suggest that preferences may be characterised by considerable imprecision and may be influenced by market prices in predictable ways.

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Bibliographic Info

Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) with number 11-03.

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Date of creation: 01 Feb 2011
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Handle: RePEc:uea:wcbess:11-03

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Related research

Keywords: Shaping effects; repeated markets; price sensitivity; preference imprecision;

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References

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  1. Graham Loomes & Chris Starmer & Robert Sugden, 2009. "Preference reversals and disparities between willingness to pay and willingness to accept in repeated markets," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 09-07, School of Economics, University of East Anglia, Norwich, UK..
  2. Shogren, Jason F. & Shin, Seung Youll & Hayes, Dermot J. & Kliebenstein, James, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," Staff General Research Papers 701, Iowa State University, Department of Economics.
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  7. Payne, John W & Bettman, James R & Schkade, David A, 1999. "Measuring Constructed Preferences: Towards a Building Code," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 243-70, December.
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  16. Fabio Tufano, 2008. "Are ‘True’ Preferences Revealed in Repeated Markets? An Experimental Demonstration of Context-dependent Valuations," Discussion Papers 2008-12, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  17. Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer, vol. 4(3), pages 257-269, December.
  18. Uri Simonsohn & George Loewenstein, 2006. "Mistake #37: The Effect of Previously Encountered Prices on Current Housing Demand," Economic Journal, Royal Economic Society, vol. 116(508), pages 175-199, 01.
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  20. Jacinto Braga & Chris Starmer, 2005. "Preference Anomalies, Preference Elicitation and the Discovered Preference Hypothesis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(1), pages 55-89, 09.
  21. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  22. David J. Butler & Graham C. Loomes, 2007. "Imprecision as an Account of the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 97(1), pages 277-297, March.
  23. Graham Loomes & Chris Starmer & Robert Sugden, 2003. "Do Anomalies Disappear in Repeated Markets?," Economic Journal, Royal Economic Society, vol. 113(486), pages C153-C166, March.
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Cited by:
  1. Smith, John, 2010. "The endogenous nature of the measurement of social preferences," MPRA Paper 23282, University Library of Munich, Germany.
  2. Sugden, Robert & Zheng, Jiwei & Zizzo, Daniel John, 2013. "Not all anchors are created equal," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 21-31.

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