Session 4
Question 1
A team of researchers conducted a market experiment in which participants acted as sellers and
buyers and could make trades on the market. Sellers were assigned a baseball card (which had no
value outside of the experiment) and had the goal to sell it on the market at a price that was as high
as possible. The price the sellers received for the card then determined their payoffs. Buyers received
payoffs if they bought the card; their payoffs were the higher, the lower the realized price was.
The main treatment variation was as follows: Before a trading period started, market participants
received the following message: “In a previous experiment, the first trade was made at a price of X
Euro.” X was varied by the researchers: In one experimental treatment, participants were
communicated a high value (e.g. 25 Euro, Treatment_HIGH) whereas in the other experimental
treatment, participants were communicated a low value (e.g. 5 Euro, Treatment_LOW).
a) Please explain how you would expect (average) prices to differ between Treatment_HIGH and
Treatment_LOW. Please explain the cognitive process among traders that leads to this result. Next,
would you expect that the results will be different if the researchers would play the market game with
participants who trade for the first time or with experienced traders who have already participated in
20 rounds of the market experiment? Please provide the reasoning behind your answer.
b) Please briefly explain the decision situation and the main result of an experiment on bids in
classroom auctions you know from the textbook of Hastie and Dawes that investigates the same
phenomenon as the study described above and mention two important differences between the two
experimental designs.
Question 2
Kahneman and Tversky (1973) presented experimental participants the following description of a
hypothetical student:
Tom W. is of high intelligence, although lacking in true creativity. He has a need for order and clarity,
and for neat and tidy systems in which every detail finds its appropriate place. His writing is rather dull
and mechanical […]. He has a strong drive for competence. He seems to have little feel and little
sympathy for other people and does not enjoy interacting with others. Self-centered, he nonetheless
has a deep moral sense.
Kahneman and Tversky found that “more than 95% of […] respondents judged that Tom W. is more
likely to study computer science than humanities or education, although they were surely aware of
the fact that there are many more graduate students in the latter field” (the study was conducted in
the 1970s).
Which major judgment heuristic can explain this experimental finding? Moreover, please explain what
this heuristic implies for the judgment of a person who has to classify an object or an event into a
certain category.