Working Paper: NBER ID: w9736
Authors: John A. List
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.
Keywords: No keywords provided
JEL Codes: C93; D11; H0; Q0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entitlements (H55) | trading decisions (G11) |
| market experience (G10) | trading decisions (G11) |
| inexperienced consumers (D11) | prospect theory predictions (D81) |
| experienced consumers (D12) | neoclassical predictions (F11) |
| learning process (J24) | preferences (D11) |
| hicksian equivalent surplus (D46) | hicksian compensating surplus (D11) |