How Social Categories Affect Market Prices

Where do valuations come from? This question — fundamental to finance and economics as well as law, public policy, and other realms of life — can be answered in at least three different ways. First, neoclassical economics, with its trademark assumptions of rational, self-interested and optimizing individuals, offers seductively straightforward answers. These answers, prevalent in the academic literature as well as in business school curricula and among practitioners, have been qualified by the advance of behavioral economics. This perspective, rooted in cognitive psychology, offers a second way to answer the question: Valuations are subject to people’s bounded rationality. Here, building on evidence and methods from economics and psychology, we explore a complementary approach that focuses on the interpersonal: We study how social categories affect traders and price bubbles in experimental markets.

(a longer version, including relevant references, is enclosed)