Monetary Valuations in Repeated Markets: Do Prices Matter?

Andrea Isoni

CREED-CEDEX-UEAMeeting on Experimental Economics

Amsterdam, 5th and 6th June 2008

Joint with: P. Brooks, G. Loomes and R. Sugden

Outline

1. The issues2. Research questions3. The Experiment4. Results5. Conclusion

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Anomalies reduced in markets

WTA/WTP disparity (e.g. Coursey et al., 1987; Shogren et al., 1994, 2001; Loomes et al., 2003, 2007)

Preference reversal (Cox and Grether, 1996; Braga et al., 2006)

Shaping effectsDecay compatible with ‘price following’ (e.g. Shogren et al., 2001; Cox and Grether, 1996; Knetsch 2001, Loomes et al., 2003,)

Anchoring Anchoring manipulations persist after marketrepetition (Ariely et al., 2003)

Price sensitivity and ‘bad-deal’ aversion A model with in-built shaping effects (Isoni, 2008)

The issues

Do market prices shape valuations?

Does market interaction eliminate the effect of external manipulations?

Shaping effectsAnchoring

General ability of repeated markets to reveal consistent preferences

Research questions

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Median-price selling auctions repeated 8 timesLottery tickets5/7 players

The Experiment

asks

a1 a2 a3 a4 a5 a6 a7

Sell item Do not sell item

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Test 1 Test 2 Test 3

Mixed markets Homogeneous markets

High/low prompt markets

Shaping effects Persistence of shaping

Persistence of anchoring

A median price selling auction with 7 traders

TEST 1: MIXED MARKETS

Valuations constrained to ranges of prizesMax 3 values below £7Max 3 values above £9

Price constrained between £7 and £9 (more)

High feedback for L traders – shape upLow feedback for H traders – shape down

Compare to control markets (all same lottery)

The Experiment

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Low-lottery

(L)

Medium-lottery

(M)

High-lottery

(H)

(£2, 0.8; £9, 0.2) (£7, 0.5; £9, 0.5) (£7, 0.2; £14, 0.8)

3 traders 1 trader 3 traders

Controlling price feedback in mixed markets

The Experiment

2 7 9 14£

L = (£2, 0.8; £9, 0.2)

H = (£7, 0.2; £14, 0.8)

M = (£7, 0.5; £9, 0.5)

Market

priceArtificially high feedback

Artificially low feedback

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

TEST 2: HOMOGENEOUS MARKETS

Traders from mixed markets re-matched according to lottery

Compare to control markets

TEST 3: HIGH/LOW PROMPT MARKETS

Anchoring manipulationbefore market starts

E = (£1, 0.95; £50, 0.05)

High vs. low prompt:do they converge?

The Experiment

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

High prompt Low Prompt

£20 or more £1 to £2

£19.90 to £15 £2.10 to £3

£14.90 to £10 £3.10 to £4

£9.90 to £5 £4.10 to £5

£4.90 to £1 £5.10 or more

Predict price from range

Lab: Social Science for the Environment Virtual Reality and Experimental Laboratories (SSEVREL) of the University of East Anglia

Sessions: 18 overall

Participants: 204 subjects from general student population

Duration: about 1 hour 20 minutes per session

Earnings: £7.50 on average

Software: z-Tree (Fischbacher, 2007)

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery L

2

3

4

5

6

7

8

9

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Val

ues

(£)

mixed market vs. control market homogeneous market vs. control market

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery L

2

3

4

5

6

7

8

9

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Va

lue

s (

£)

mixed market vs. control market homogeneous market vs. control market

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery L

2

3

4

5

6

7

8

9

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Va

lue

s (

£)

mixed market vs. control market homogeneous market vs. control market

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery L

2

3

4

5

6

7

8

9

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Va

lue

s (

£)

mixed market vs. control market homogeneous market vs. control market

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery H

7

8

9

10

11

12

13

14

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Val

ues

(£)

mixed market vs. control market homogeneous market vs. control market

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery H

7

8

9

10

11

12

13

14

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Val

ues

(£)

mixed market vs. control market homogeneous market vs. control market

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery H

7

8

9

10

11

12

13

14

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Val

ues

(£)

mixed market vs. control market homogeneous market vs. control market

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery H

7

8

9

10

11

12

13

14

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Auction period

Val

ues

(£)

mixed market vs. control market homogeneous market vs. control market

To recap

TEST 1 Large shaping effects, stronger when feedback is artificially high (L) than when it is low (H)

Asymmetry compatible with ‘bad-deal’ aversion- when price is high, valuations pulled up to avoid bad deals (L)- when price is low, valuations pulled downwards to make good deals (H)

TEST 2Strong de-shaping for high feedback (L), but still significant difference after 8 rounds

General persistence for low feedback (H)

Some tendency to underlying values/market discipline?

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery E - High prompt

3

4

5

6

7

8

9

10

11

12

13

0 1 2 3 4 5 6 7 8 9Auction Period

Val

ue

(£)

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery E - Low prompt

3

4

5

6

7

8

9

10

11

12

13

0 1 2 3 4 5 6 7 8 9Auction Period

Va

lue

(£)

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Valuations for lottery E

3

4

5

6

7

8

9

10

11

12

13

0 1 2 3 4 5 6 7 8 9Auction Period

Val

ue

(£)

To recap

TEST 3

Strong and persistent effect of prompt on valuations

Effect possibly reinforced by group-specific feedback (a form of shaping?)- valuations not significantly different across trading groups in period 1- significant differences arise in last period

Results

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Monetary valuations are malleable

- Via price feedback (especially if high) - Via anchoring manipulations

Market forces do not eliminate these effects

- Shaping effects mostly persist when feedback is artificially low, and are somewhat eroded when it is artificially high - Anchoring effects persist and are possibly reinforced through group-specific feedback

Prices DO matter in markets

Markets do not necessarily reveal consistent preferences (provided such preferences exist)

Conclusion

1. The issues

2. Research questions

3. The experiment

4. Results

5. Conclusion

Thank you!