Effects of Ambiguity in Market Experiments
Prior studies have shown that individuals are averse to ambiguity in probability. Many decisions are, however, made in market settings where an individual's decision is influenced by decisions of others participating in the market. In this paper, we extend the previous research to evaluate the effect of ambiguity on individual decisions and the resulting market price in market settings. We therefore examine an important issue: whether ambiguity effects persist in the face of market incentives and feedback. Two different market organizations, the sealed bid auction and the double oral auction, were employed. The subjects in the experiments were graduate business students and bank executives. Our results show that the individual bids and market prices for lotteries with ambiguous probabilities are consistently lower than the corresponding bids and market prices for equivalent lotteries with well-defined probabilities. The aversion to ambiguity therefore does not vanish in market settings. Our results provide insights into what a manager can expect in bidding situations where the object of the sale (oil leases, mineral rights) involves ambiguity in probability due to, for example, lack of information or prior experience. The results may also be useful in understanding some phenomena in insurance and equity markets.
Volume (Year): 39 (1993)
Issue (Month): 5 (May)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:39:y:1993:i:5:p:602-615. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.