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Do markets reveal preferences - or shape them?

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

Find related papers by JEL classification:

  • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
  • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
  • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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  1. Harrison, Glen W. & Ronald M. Harstad & E. Elisabet Rutström, 1995. "Experimental Methods and Elicitation of Values," Discussion Paper Serie B 349, University of Bonn, Germany.
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  19. Loomes, Graham & Chris Starmer & Robert Sugden, 2002. "Do Anomalies Disappear in Repeated Markets?," Royal Economic Society Annual Conference 2002 132, Royal Economic Society.
  20. 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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Cited by:

  1. Sergio Beraldo & Valerio Filoso & Marco Stimolo, 2014. "The Shaping Power of Market Prices and Individual Choices on Preferences. An Experimental Investigation," Discussion Papers 2014/191, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  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.
  3. Smith, John, 2010. "The endogenous nature of the measurement of social preferences," MPRA Paper 23282, University Library of Munich, Germany.

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