Brian D. Kluger, Steve B. Wyatt, Preferencing, Internalization of Order Flow, and Tacit Collusion: Evidence from Experiments, The Journal of Financial and Quantitative Analysis, Vol. 37, No. 3 (Sep., 2002), pp. 449-469

ABSTRACT The question of whether individual judgment errors survive in market equilibrium is an issue that naturally lends itself to experimental analysis. Here, the Monty Hall problem is used to detect probability judgment errors both in a cohort of individuals and in a market setting. When all subjects in a cohort made probability judgment errors, market prices also reflected the error. However, competition among two bias‐free subjects was sufficient to drive prices to error‐free levels. Thus, heterogeneity in behavior can be an important factor in asset pricing, and further, it may take few bias‐free traders to make asset prices bias‐free.