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Financial Engineering and Rationality: Experimental Evidence Based on the Monty Hall Problem

Financial engineering often involves reconfiguring existing financial assets to create new financial products. This article investigates whether financial engineering can alter the environment so that irrational agents can quickly learn to be rational. We design two financial assets that embed the Monty Hall problem, a well-studied choice anomaly. Our experiment requires each subject to value one of these assets. Although these assets are equivalent in terms of standard choice theory, valuation experience with one of the assets lowers the subjects' cognitive error rates more than valuation experience with the other asset. We conclude that financial engineering can create learning opportunities and reduce cognitive errors.