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Monetary Valuations in Repeated Markets: Do Prices Matter? Andrea Isoni CREED-CEDEX-UEA Meeting on Experimental Economics Amsterdam, 5th and 6th June 2008 Joint with: P. Brooks, G. Loomes and R. Sugden Outline 1. 2. 3. 4. 5. The issues Research questions The Experiment Results Conclusion The issues 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 effects Decay 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 market repetition (Ariely et al., 2003) Price sensitivity and ‘bad-deal’ aversion A model with in-built shaping effects (Isoni, 2008) 1. The issues 2. Research questions 3. The experiment 4. Results 5. Conclusion Research questions Do market prices shape valuations? 1. The issues Does market interaction eliminate the effect of external manipulations? Shaping effects Anchoring 2. Research questions 3. The experiment 4. Results 5. Conclusion General ability of repeated markets to reveal consistent preferences The Experiment Test 1 Test 2 Test 3 Mixed markets Homogeneous markets High/low prompt markets Shaping effects Persistence of shaping Persistence of anchoring Median-price selling auctions repeated 8 times Lottery tickets 5/7 players A median price selling auction with 7 traders asks a1 a2 Sell item a3 a4 a5 a6 a7 Do not sell item 1. The issues 2. Research questions 3. The experiment 4. Results 5. Conclusion The Experiment TEST 1: MIXED MARKETS 1. The issues 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 2. Research questions 3. The experiment 4. Results 5. Conclusion Valuations constrained to ranges of prizes Max 3 values below £7 Max 3 values above £9 Price constrained between £7 and £9 (more) High feedback for L traders – shape up Low feedback for H traders – shape down Compare to control markets (all same lottery) The Experiment Controlling price feedback in mixed markets 1. The issues 2. Research questions H = (£7, 0.2; £14, 0.8) 3. The experiment M = (£7, 0.5; £9, 0.5) L = (£2, 0.8; £9, 0.2) 5. Conclusion £ 2 9 Market price Artificially high feedback 7 4. Results 14 Artificially low feedback The Experiment TEST 2: HOMOGENEOUS MARKETS Traders from mixed markets re-matched according to lottery Compare to control markets 1. The issues 2. Research questions 3. The experiment TEST 3: HIGH/LOW PROMPT MARKETS Anchoring manipulation before market starts E = (£1, 0.95; £50, 0.05) High vs. low prompt: do they converge? Predict price from range 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 4. Results 5. Conclusion Results Lab: Social Science for the Environment Virtual Reality and Experimental Laboratories (SSEVREL) of the University of East Anglia Sessions: 18 overall 1. The issues 2. Research questions 3. The experiment Participants: 204 subjects from general student population 4. Results 5. Conclusion Duration: about 1 hour 20 minutes per session Earnings: £7.50 on average Software: z-Tree (Fischbacher, 2007) Results Valuations for lottery L 1. The issues 9 2. Research questions 8 Values (£) 3. The experiment 7 4. Results 6 5. Conclusion 5 4 3 mixed market vs. control market homogeneous market vs. control market 2 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results Valuations for lottery L 1. The issues 9 2. Research questions 8 Values (£) 3. The experiment 7 4. Results 6 5. Conclusion 5 4 3 mixed market vs. control market homogeneous market vs. control market 2 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results Valuations for lottery L 1. The issues 9 2. Research questions 8 Values (£) 3. The experiment 7 4. Results 6 5. Conclusion 5 4 3 mixed market vs. control market homogeneous market vs. control market 2 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results Valuations for lottery L 1. The issues 9 2. Research questions 8 Values (£) 3. The experiment 7 4. Results 6 5. Conclusion 5 4 3 mixed market vs. control market homogeneous market vs. control market 2 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results Valuations for lottery H 14 1. The issues 2. Research questions homogeneous market vs. control market mixed market vs. control market 13 3. The experiment Values (£) 12 4. Results 5. Conclusion 11 10 9 8 7 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results Valuations for lottery H 14 1. The issues 2. Research questions homogeneous market vs. control market mixed market vs. control market 13 3. The experiment Values (£) 12 4. Results 5. Conclusion 11 10 9 8 7 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results Valuations for lottery H 14 1. The issues 2. Research questions homogeneous market vs. control market mixed market vs. control market 13 3. The experiment Values (£) 12 4. Results 5. Conclusion 11 10 9 8 7 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results Valuations for lottery H 14 1. The issues 2. Research questions homogeneous market vs. control market mixed market vs. control market 13 3. The experiment Values (£) 12 4. Results 5. Conclusion 11 10 9 8 7 0 1 2 3 4 5 6 7 8 9 Auction period 10 11 12 13 14 15 16 17 Results 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 2 Strong 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? 1. The issues 2. Research questions 3. The experiment 4. Results 5. Conclusion Results 1. The issues Valuations for lottery E - High prompt 13 2. Research questions 12 3. The experiment 11 4. Results Value (£) 10 5. Conclusion 9 8 7 6 5 4 3 0 1 2 3 4 5 Auction Period 6 7 8 9 Results 1. The issues Valuations for lottery E - Low prompt 2. Research questions 13 12 3. The experiment 11 4. Results Value (£) 10 5. Conclusion 9 8 7 6 5 4 3 0 1 2 3 4 5 Auction Period 6 7 8 9 Results 1. The issues Valuations for lottery E 13 2. Research questions 12 3. The experiment 11 4. Results Value (£) 10 5. Conclusion 9 8 7 6 5 4 3 0 1 2 3 4 5 Auction Period 6 7 8 9 Results To recap 1. The issues TEST 3 Strong and persistent effect of prompt on valuations 2. Research questions 3. The experiment 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 4. Results 5. Conclusion 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) 1. The issues 2. Research questions 3. The experiment 4. Results 5. Conclusion Thank you!