Mispricing: meaning, definitions and examples

Economics

• Mispricing can lead to market inefficiencies, meaning that resources may not be used in the best possible way.
• In competitive markets, prices are expected to reflect the true value of a product, so mispricing can create opportunities for buyers and sellers.
• Regulators monitor mispricing because it can indicate issues like fraud or market manipulation.

Psychology

• People often anchor their perceptions of value based on previous prices they have seen, which can make them more vulnerable to mispriced items.
• Loss aversion plays a role; consumers might refuse to buy something they perceive as overpriced, even if it could be a good deal compared to competitors.
• Emotional responses to price changes can affect how consumers react to mispricing, with some feeling joy or regret based on their expectations.

Technology

• Algorithmic trading can lead to rapid mispricing if trading bots react to market data incorrectly or too quickly.
• Online marketplaces often use dynamic pricing models, which can lead to temporary mispricing due to errors in algorithm calculations.
• Blockchain technology is being explored to reduce mispricing by providing more transparency and verification in pricing.

Investment

• Investors often look for mispricing as a strategy to achieve gains, buying undervalued assets and selling overvalued ones.
• In financial markets, mispricing can lead to arbitrage opportunities, where savvy traders exploit price differences to make profits.
• Mispricing can signal broader market trends, helping analysts predict future economic conditions.

Case Studies

• In the 2008 financial crisis, mispricing of mortgage-backed securities led to widespread economic repercussions.
• A well-known tech company once had a product listed at a fraction of its value online, leading to a temporary spike in sales before the error was corrected.
• Retailers sometimes unwittingly misprice items during holiday sales, causing unexpected consumer behavior and inventory challenges.