Do markets reveal preferences or shape them?

ISONI, ANDREA;Brooks P;Loomes G;Sugden R.

2016-01-01

---

Abstract

We contrast the proposition that markets reveal independently existing preferences with the alternative possibility that they may help to shape them. Using demand-revealing experimental market institutions, we separate the shaping effects of price cues from the effects of market discipline. We find that individual valuations and prevailing prices are systematically affected by both exogenous manipulations of price expectations and endogenous but divergent price feedback. These effects persist to varying degrees, in spite of further market experience. In some circumstances, market experience may actually consolidate them. We discuss possible explanations for these effects of uninformative price cues on revealed preferences.