Case-based Biases in Intuitive Probability and Pricing Judgments

Speaker: Derek Koehler (Cognitive Psychology)

A stock market simulation tested whether known biases in probability judgment are attenuated in an asset pricing setting. As expected from the principle of case-based judgment, but contrary to the rational expectations hypothesis, prices were largely driven by an evaluation of case-specific information (a s financial indicators), with insufficient regard to characteristics of the broader class from which the case was drawn (the market). The observation of systematic mispricing holds for buying as well as selling, is not attributable to risk attitudes, and is not diminished with experience in the market environment despite opportunities for learning from immediate financial feedback. Work in progress explores how other forms of market interaction may enhance individuals' ability to adjust prices in response to class-based considerations.