Reasoning and Institutions: Do Markets Facilitate Logical Reasoning in the Wason Selection Task?

A vast literature shows that individuals frequently fail to identify the normative solutions in logical reasoning tasks. Much attention has been devoted to the study of these deviations at the individual level; less eVort was exerted to investigate whether institutional settings might facilitate and improve reasoning. In this paper we address this question by embedding theWason selection task in a competitive market: each of the four cards of the task was traded over multiple periods in anonymous continuous double auctions, and with real financial incentives. The results of two experiments involving 28 markets, with eight subjects each, indicate that errors in logical reasoning persist, and are present in a wide variety of trading variables, such as prices, volume and liquidity. The market’s behavior reflects the normatively correct outcome only when a substantial number of traders know the correct solution.