Andy Mangan scored the only goal of the game in the first half at the King Power Stadium as League Two side Shrewsbury claimed a Premier League scalp in the second round.
Pearson fielded a much-changed side, with youngsters James Pearson, Michael Cain and Ryan Watson making their debuts, and that decision back-fired as Leicester crashed out.
The Leicester manager made no excuses for the defeat and believes it should be a learning experience for the players who were given a chance to catch the eye.
"It was a poor performance from us at a time when whichever side we put out, I think we should have progressed," he told the club's official website.
"We didn't do enough and that's disappointing. What it does mean is that the players must understand that the level of performance and application we've shown in the two Premier League games so far, where we've been exceptional, is the baseline for how we go about this season.
"When you get disappointing results, you've got to look at how you go about using it as a learning experience. I think the players should understand by now exactly what is expected, and clearly tonight it wasn’t enough."
Leicester, who lose to Chelsea in their last top-flight outing, host Arsenal in the Premier League on Sunday.