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

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