The effects of biases in probability judgments on market prices

Ganguly, Ananda R.; Kagel, John H.; Moser, Donald V.

doi:10.1016/0361-3682(94)90029-9

Cited by 52 publications

(24 citation statements)

References 30 publications

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“…In fact, the Tuttle et al (1997) finding of significant recency effects in market prices suggests that markets cannot be counted on to eliminate the particular bias that we study. Camerer et al (1989) and Ganguly et al (1994) provide other examples of biases that persist in market settings (e.g. the 'curse of knowledge' and the base rate fallacy).…”

Section: Discussionmentioning

confidence: 98%

Eliminating recency with self‐review: the case of auditors' ‘going concern’ judgments

Ashton¹,

Kennedy²

2002

Behavioral Decision Making

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This paper examines the use of self-review to debias recency. Recency is found in the 'going concern' judgments of staff auditors, but is successfully eliminated by the auditor's use of a simple self-review technique that would be extremely easy to implement in audit practice. Auditors who self-review are also less inclined to make audit report choices that are inconsistent with their going concern judgments. These results are important because the judgments of staff auditors often determine the type and extent of documentation in audit workpapers and serve as preliminary inputs for senior auditors' judgments and choices. If staff auditors' judgments are affected by recency, the impact of this bias may be impounded in the ultimate judgments and choices of senior auditors. Since biased judgments can expose auditors to significant costs involving extended audit procedures, legal liability and diminished reputation, simple debiasing techniques that reduce this exposure are valuable. The paper also explores some future research needs and other important issues concerning judgment debiasing in applied professional settings.

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Section: Discussionmentioning

confidence: 98%

Eliminating recency with self‐review: the case of auditors' ‘going concern’ judgments

Ashton¹,

Kennedy²

2002

Behavioral Decision Making

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“…Despite the importance of this question, only a few studies have directly examined the link between judgment errors and prices using experimental economics methods. Duh and Sunder (1986), Camerer (1987), Ganguly, Kagel, and Moser (1994), and Anderson and Sunder (1995) focus on whether deviations from Bayesian predictions are present in experimental market prices, but present inconclusive evidence on the question. Bayes' rule, however, is not an ideal tool to study probability judgment errors in markets because a behavioral alternative to Bayes' rule is not well specified.…”

mentioning

confidence: 99%

Are Judgment Errors Reflected in Market Prices and Allocations? Experimental Evidence Based on the Monty Hall Problem

Kluger¹,

Wyatt

2004

The Journal of Finance

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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 ref lected the error. However, competition among two biasfree 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.IN RECENT YEARS, behavioral researchers have challenged the joint hypotheses of efficient markets and the idea that average (excess) returns are solely rewards for risk, suggesting that these are deficient for interpreting capital market data (De Bondt and Thaler (1985), Shleifer (2000), Hirshleifer (2001)). They argue that individual cognitive errors are useful in interpreting marketwide anomalies, presupposing that individual judgment errors aggregate into similar marketwide errors. Other researchers instead maintain that individual judgment errors do not materially affect markets in equilibrium. Rubinstein (2001, p. 26) summarizes: "Some adherents of behavioral finance begin sensibly enough with the results of convincing experiments that show human beings are irrational in certain specific systemic ways. But then comes the hand waving as they try to extend the results to the much more complex, long-lasting, repetitive and subtle environment of the market. This extension requires a big leap of faith." This paper offers direct experimental evidence about the link between individuals' judgment errors and market equilibrium. We perform two sets of experiments: the first establishes the absence or presence of judgment errors in a cohort of individuals. In the second experiment we change the context to a market setting. We can then observe the extent to which judgment errors observed in the individual experiments are ref lected in market prices and allocations. We further vary the types of trading opportunities to test some conjectures about how judgment errors could be eliminated in markets.

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“…Experience reduced this bias, however, and market prices approached the Bayesian prediction when subjects were allowed to trade in a double-oral auction market. Ganguly, Kagel, and Moser (1994) found that, due to the prohibition of short-selling, market prices were more likely to exhibit base-rate neglect when biased prices were higher than the Bayesian prediction.…”

Section: Acknowledgmentsmentioning

confidence: 97%

Inefficiency in Earnings Forecasts: Experimental Evidence of Reactions to Positive vs. Negative Information

Stevens

Williams

2003

SSRN Journal

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The effects of biases in probability judgments on market prices

Cited by 52 publications

References 30 publications

Eliminating recency with self‐review: the case of auditors' ‘going concern’ judgments

Eliminating recency with self‐review: the case of auditors' ‘going concern’ judgments

Are Judgment Errors Reflected in Market Prices and Allocations? Experimental Evidence Based on the Monty Hall Problem

Inefficiency in Earnings Forecasts: Experimental Evidence of Reactions to Positive vs. Negative Information

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