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Is the lure of choice reflected in market prices? Experimental evidence based on the 4-door Monty Hall problem

  • Siddiqi, Hammad

The 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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Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 30 (2009)
Issue (Month): 2 (April)
Pages: 203-215

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Handle: RePEc:eee:joepsy:v:30:y:2009:i:2:p:203-215
Contact details of provider: Web page: http://www.elsevier.com/locate/joep

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