An Investigation of the Impact of Market Discipline on Individuals' Price Revisions

Experimental market research suggests that aggregate market behavior mitigates, rather than eliminates, individual information processing biases. We extend this research using a security pricing task with three informational periods to examine the effect information order has on security prices. Subjects priced a security in either an experimental market or individual setting. Subjects in both treatments received identical information concerning the security's end-of-period value, thus differences in price between the treatments can be attributed to market discipline of individual behavior. As expected, markets' prices are more consistent with Bayesian revision than are those of individuals; however, individuals were influenced less by the order of information than were markets. We propose that individuals were more consistent in the weights assigned to pieces of information than were markets. It appears that markets do not eliminate or mitigate individual processing biases. Rather, market discipline may lead to completely different processing biases. These results have implications for users and providers of accounting information and may have a profound impact on the timing and order of information made public by management. Additionally, the results call for continued investigation into the relationship between individual information processing biases and aggregate market behavior.

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