The Effects of Beliefs versus Risk Preferences on Bargaining Outcomes
AbstractIn bargaining environments with uncertain impasse outcomes (e.g., litigation or labor strike outcomes), there is an identification problem that confounds data interpretation. In such environments, the minimally acceptable settlement value from a risk-averse (risk-loving) but unbiased bargainer is empirically indistinguishable from what one could get with risk-neutrality and pessimism (optimism). This paper reports data from a controlled bargaining experiment where risk preferences and beliefs are both measured in order to assess their relative importance in bargaining outcomes. The average lab subject is risk-averse, yet optimistic, which is consistent with existing studies that examine each in isolation. I also find that the effects of optimism dominate those of risk-aversion. Optimistic bargainers are significantly more likely to dispute and have aggressive final bargaining positions. Dispute rates are not statistically affected by risk preferences, but there is some evidence that risk aversion leads to less aggressive bargaining positions and lower payoff outcomes. A key implication is that increased settlement rates are more likely achieved by minimizing impasse uncertainty (to limit the potential for optimism) rather than maximizing uncertainty (to weaken the reservation point of risk-averse bargainers), as has been argued in the dispute resolution literature.
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Bibliographic InfoPaper provided by Department of Economics, Appalachian State University in its series Working Papers with number 05-17.
Date of creation: 2005
Date of revision:
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Postal: Thelma C. Raley Hall, Boone, North Carolina 28608
Web page: http://www.business.appstate.edu/departments/economics/
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risk preference; optimism; bargaining; experiments;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-25 (All new papers)
- NEP-CBE-2005-07-25 (Cognitive & Behavioural Economics)
- NEP-EXP-2005-07-25 (Experimental Economics)
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- David Dickinson & Lynn Hunnicutt, 2005. "Nonbinding Suggestions: The Relative Effects of Focal Points versus Uncertainty Reduction on Bargaining Outcomes," Working Papers 05-13, Department of Economics, Appalachian State University.
- David Dickinson & Lynn Hunnicutt, 2010. "Nonbinding recommendations: the relative effects of focal points versus uncertainty reduction on bargaining outcomes," Theory and Decision, Springer, vol. 69(4), pages 615-634, October.
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