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When a risky prospect is valued more than its best possible outcome

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  • Andreas C. Drichoutis
  • Rodolfo M. Nayga
  • Jayson L. Lusk
  • Panagiotis Lazaridis

Abstract

In this paper, we document a violation of normative and descriptive models of decision making under risk. In contrast to uncertainty effects found by Gneezy, List and Wu (2006), some subjects in our experiments valued lotteries more than the best possible outcome. We show that the overbidding effect is more strongly related to individuals' competitiveness traits than comprehension of the lottery's payoff mechanism.

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Bibliographic Info

Article provided by Society for Judgment and Decision Making in its journal Judgment and Decision Making.

Volume (Year): 7 (2012)
Issue (Month): 1 (January)
Pages: 1-18

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Handle: RePEc:jdm:journl:v:7:y:2012:i:1:p:1-18

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Related research

Keywords: Decision making under risk; competitiveness; lottery payoff comprehension; experiments.;

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References

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  1. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  2. Corrigan, Jay & Drichoutis, Andreas & Lusk, Jayson & Nayga, Rodolfo & Rousu, Matt, 2011. "Repeated Rounds with Price Feedback in Experimental Auction Valuation: An Adversarial Collaboration," MPRA Paper 28337, University Library of Munich, Germany.
  3. DavidJ. Cooper & Hanming Fang, 2008. "Understanding Overbidding In Second Price Auctions: An Experimental Study," Economic Journal, Royal Economic Society, vol. 118(532), pages 1572-1595, October.
  4. Uri Gneezy & John A List & George Wu, 2006. "The Uncertainty Effect: When a Risky Prospect Is Valued Less Than Its Worst Possible Outcome," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1283-1309, November.
  5. David M. Grether & James C. Cox, 1996. "The preference reversal phenomenon: Response mode, markets and incentives (*)," Economic Theory, Springer, vol. 7(3), pages 381-405.
  6. Lusk,Jayson L. & Shogren,Jason F., 2007. "Experimental Auctions," Cambridge Books, Cambridge University Press, number 9780521671248, December.
  7. Gill, David & Stone, Rebecca, 2010. "Fairness and desert in tournaments," Games and Economic Behavior, Elsevier, vol. 69(2), pages 346-364, July.
  8. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
  9. Ondrej Rydval & Andreas Ortmann & Sasha Prokosheva & Ralph Hertwig, 2009. "How Certain Is the Uncertainty Effect?," CERGE-EI Working Papers wp385, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  10. Grether, David M. & Plott, Charles R., . "Economic Theory of Choice and the Preference Reversal Phenomenon," Working Papers 152, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Shogren, Jason F. & Cho, Sungwon & Koo, Cannon & List, John & Park, Changwon & Polo, Pablo & Wilhelmi, Robert, 2001. "Auction mechanisms and the measurement of WTP and WTA," Resource and Energy Economics, Elsevier, vol. 23(2), pages 97-109, April.
  12. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstr�m, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
  13. Kagel, John H & Harstad, Ronald M & Levin, Dan, 1987. "Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study," Econometrica, Econometric Society, vol. 55(6), pages 1275-1304, November.
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