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A Bayesian Examination of Anchoring Bias and Cheap Talks in Constructed Markets

Author

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  • Aadland, David
  • Caplan, Arthur J.
Abstract
We present a theoretical framework for understanding the relationship between anchoring bias, hypothetical bias, and cheap talk in constructed markets. In our theory, interviewers provide agents with signals such as cheap talk and bid values while eliciting the value for nonmarket goods. In response to these signals, agents revise their prior distributions over the value of the good. Previous empirical studies have failed to account for the interaction between cheap talk and anchoring during this updating process, leading researchers to incorrectly assess the effects of cheap talk in reducing hypothetical bias. In particular, we predict that cheap talk will appear to be more effective for relatively large bids. We test our theory in an experimental setting where agents are asked to make a hypothetical voluntary contribution to a public good. The experimental results, as well as several recent empirical studies, are consistent with the theory.

Suggested Citation

  • Aadland, David & Caplan, Arthur J., 2005. "A Bayesian Examination of Anchoring Bias and Cheap Talks in Constructed Markets," 2005 Annual meeting, July 24-27, Providence, RI 19568, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea05:19568
    DOI: 10.22004/ag.econ.19568
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    References listed on IDEAS

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