Friday, March 10, 2006

The Effect of Market Experience in Evaluating Prospect Theory

This is an interesting paper dealing with Prospect Theory vs. Neoclassical Economics. List basically argues that prospect theory is a better description of newbies, while experienced market-players are more like the rational-bums that neoclassicals like.

Anyway, here is the abstract:

"Neoclassical theory postulates that preferences between two goods are independent of the consumer's current entitlements. Several experimental studies have recently provided strong evidence that this basic independence assumption, which is used in most theoretical and applied economic models to assess the operation of markets, is rarely appropriate. These results, which clearly contradict closely held economic doctrines, have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory e.g., prospect theory, which invokes psychological effects. This paper pits neoclassical theory against prospect theory by investigating three clean tests of the competing hypotheses. In all three cases, the data, which are drawn from nearly 500 subjects actively participating in a well-functioning marketplace, suggest that prospect theory adequately organizes behavior among inexperienced consumers, whereas consumers with intense market experience behave largely in accordance with neoclassical predictions. The pattern of results indicates that learning primarily occurs on the sell side of the market: agents with intense market experience are more willing to part with their entitlements than lesser-experienced agents."

2 Comments:

Anonymous Anonymous said...

That is a pretty interesting theory. But then again, List is full of them.

March 14, 2006 5:39 PM  
Blogger AC said...

turns out that List is a professor at UMD.

March 17, 2006 8:10 AM  

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