Knowledge and use of price distributions by populations and individuals

How much do individuals, compared to the population, know about the distribution of values in the world? Participants reported the prices of consumer goods such as watches and belts and we compared how accurately individuals vs. the overall population knew the mean and dispersion of prices. Although individuals and the population both knew objects’ average prices and relative standard deviations, the population was more sensitive to the absolute standard deviation of prices. In a second experiment, we examined whether individuals’ impoverished distribution knowledge impairs their ability to interpret advertisements. Consistent with people using Bayesian inference, the higher an object’s actual price dispersion, the more participants relied on advertisements; however, this effect is considerably smaller than a simple proportional offset, suggesting again that individuals underestimate dispersion. Thus, despite having a sense of the distribution of real world quantities, individuals tend to know only a fraction of the world distribution.