Do Markets Correct Biases in Probability Judgment? Evidence from Market Experiments
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In this chapter, two studies are reported which test whether simple
biases in the probability judgment of individuals affect their aggregate
behavior in markets. A judgment bias is a systematic error, which does
not cancel out when individual judgments are aggregated.
Trading in a market is one of many tasks used to study individual
decision making. The natural hypothesis is that biases which have been
found using other tasks will also affect individual judgment in a market
setting. However, to economists the market 'task' is special: Economists
think irrationality is generally erased by the forces of market discipline
(or at least, market prices are not determined by the actions of irrational
people). Since judgment biases are irrational, economists therefore conclude
that these biases will not affect market outcomes. Their argument
deserves a closer examination.