The Effect of Monetary Feedback and Information Spillovers on Cognitive Errors: Evidence from Competitive Markets

A vast literature shows that individuals frequently violate normative principles in reasoning. In evaluating the relevance of these findings for psychology, economics, and related disciplines, it is natural to ask whether reasoning errors reflect random aberrations or systematic biases. One straightforward way to approach this question is to test their persistence at the aggregate level. In this paper, we report results of four studies designed to determine if information dissemination in competitive auctions can reduce, or even eliminate, logical errors in the Wason selection task. Our results show that payoff feedback and exposure to the information flow drive the aggregate behavior toward the normative solution. We also found evidence of spillover effects from informed to uninformed traders in one-sided combinatorial auctions as well as positive transfer effects from competitive to individual settings. We discuss the implication of our results for future research at the interface of psychology and economics.