The Effects of Biases in Probability Judgments on Market Prices

Accounting, Organizations and Society, Vol. 19, No. 8, pp. 675-700, 1994

Posted: 5 Dec 2006

See all articles by Ananda R. Ganguly

Ananda R. Ganguly

Claremont McKenna College - Robert Day School of Economics and Finance

John H. Kagel

Ohio State University (OSU) - Economics

Donald V. Moser

University of Pittsburgh - Accounting Group

Abstract

Experimental Markets were used to examine whether individual probability judgment biases affect market prices. This issue is important to accountants because users of accounting information (especially investors) face competitive market environments. The expectation was that it would be more difficult for prices to be unbiased in markets where biased traders had the highest expected payoffs than in markets where unbiased traders had the highest expected payoffs. This expectation arose from the observation that competitive forces would produce biased prices when biased traders had the highest expected payoffs unless either (1) biased traders learned to be unbiased as a result of market experience, or (2) biased traders were inactive, thus allowing unbiased traders to set prices. Consistent with expectations, prices were biased in a market where biased traders had the highest expected payoffs, with prices moving toward unbiased prices but remaining more biased than biased overall. The results of this study suggest that individual judgment biases can have a substantial effect on market prices, and, consequently, demonstrations of individual investor judgment biases should be of concern to accountants.

Keywords: investor, bias, expectation, optimism, pessimism

JEL Classification: C91, C92, D40, D41, D44, D82, E31, G10, G12, M40

Suggested Citation

Ganguly, Ananda Roop and Kagel, John H. and Moser, Donald V., The Effects of Biases in Probability Judgments on Market Prices. Accounting, Organizations and Society, Vol. 19, No. 8, pp. 675-700, 1994, Available at SSRN: https://ssrn.com/abstract=949466

Ananda Roop Ganguly (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States
(909) 607-0720 (Phone)
(909) 621-8249 (Fax)

HOME PAGE: http://www.claremontmckenna.edu/academic/faculty/profile.asp?Fac=519

John H. Kagel

Ohio State University (OSU) - Economics ( email )

1945 North High Street
Columbus, OH 43210-1172
United States

Donald V. Moser

University of Pittsburgh - Accounting Group ( email )

264 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1726 (Phone)
412-648-1693 (Fax)

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