The Other Invisible Hand: How Markets—as Institutions—Propagate Conformity and Valuation Errors

Sheen S. Levine*, Edward J. Zajac

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations


The institutionalized status of markets is undoubtedly due to their presumed ability to aggregate individual bids into a single unbiased estimate of value. While not denying this emergent property of market processes, we propose and test an alternative perspective that explains how market processes can also generate the propagation of individual valuation errors that aggregate into price bubbles. Theoretically, we advance a microinstitutional perspective that draws from social and evolutionary psychology linking market processes to a more general process of institutionalization, whereby individuals seeking the adaptive benefits of conformity may—due to bounded and socially biased rationality—instead generate maladaptive individual and collective outcomes. Empirically, we craft an efficient experimental market and find three sets of evidence consistent with our microinstitutionalization perspective. We first show—at the individual level—that market participants exhibit a social bias toward conformity with the market’s collective valuation, even when the emergent market valuation is demonstrably incorrect. We then show—at the market level—that the range of valuations over time also decreases in a conforming direction, again independent of valuation accuracy. Last, we provide the first experimental test of the long-assumed effect of social ambiguity on institutionalization, finding that market participants’ over-attention to the collective valuation is indeed sensitive to variation in social ambiguity. We conclude by highlighting the relevance of our theoretical perspective, method, and findings for future research on institutions and institutionalization processes, as well as future studies on social influence and conformity-based errors.

Original languageEnglish (US)
Pages (from-to)323-348
Number of pages26
JournalStrategy Science
Issue number3
StatePublished - Sep 2023


  • decision making
  • experiments
  • institutional theory
  • managerial and organizational cognition
  • market failures
  • organization and management theory
  • two-sided markets

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management
  • Management Science and Operations Research
  • Management of Technology and Innovation


Dive into the research topics of 'The Other Invisible Hand: How Markets—as Institutions—Propagate Conformity and Valuation Errors'. Together they form a unique fingerprint.

Cite this