How psychological framing affects economic market prices in the lab and field

Sonnemann Ulrich, Camerer Colin, Fox Craig, Langer Thomas

A fundamental debate in social sciences concerns how individual judgments and choices, resulting from psychological mechanisms,are manifested in collective economic behavior. Economists emphasize the capacity of markets to aggregate information distributed among traders into rational equilibrium prices. Meanwhile, psychologists have identified pervasive and systematic biases in individual judgment that they generally assume will affect collective behavior. In particular, recent studies have found that judged likelihoods of possible events vary systematically with the way the entire event space is partitioned, with probabilities of each of n partitioned events biased toward 1/n. Thus, combining events into a common partition lowers perceived probability, and unpacking events into separate partitions increases their perceived probability. We look for evidence of such bias in various predictionmarkets, in which prices can be interpreted as probabilities ofupcoming events. We find clear evidence of partition-dependencein two highly-controlled experimental studies, including a shorttwo-hour lab experiment and a field experiment on NBA andFIFA (World Cup) sports events spanning several weeks. Wealso find evidence consistent with partition-dependence in non-experimental field data from prediction markets for economicderivatives (forecasting the values of important macroeconomicstatistics) and horse races. Results in any one of the studies mightbe explained by a specialized alternative theory, but no alternativetheories can account for the results of all four studies. We concludethat psychological biases in individual judgment can affect marketprices, and understanding those effects requires incorporatinginsights and methods from psychology into economics

behavioral economics; framing; judgment; prediction markets; psychology

Publication type
Research article (journal)

Peer reviewed

Publication status


Proceedings of the National Academy of Sciences