A Bayesian Examination of Anchoring Bias and Cheap Talk in Constructed Markets

We present a theoretical framework for understanding the relationship between anchoring bias, hypothetical bias, and cheap talk in constructed markets. In our theory, interviewers provide agents with signals such as cheap talk and bid values while eliciting the value for nonmarket goods. In response to these signals, agents revise their prior distributions over the value of the good. Previous empirical studies have failed to account for the interaction between cheap talk and anchoring during this updating process, leading researchers to incorrectly assess the effects of cheap talk in reducing hypothetical bias. In particular, we predict that cheap talk will appear to be more effective for relatively large bids. We test our theory in an experimental setting where agents are asked to make a hypothetical voluntary contribution to a public good. The experimental results, as well as several recent empirical studies, are consistent with the theory. Selected Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Providence, Rhode Island, July 24-27, 2005. ∗Aadland is an associate professor of economics at the University of Wyoming, PO Box 3985, Laramie, WY, 82071-3985, USA; 307-766-4931 (phone); 307-766-5090 (fax); [email protected] (e-mail). Caplan is an associate professor at Utah State University, 3530 Old Main Hill, Logan, UT 84341. We thank Chris McIntosh and Neil Wilmot for their assistance with the experiments.