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

Author

Listed:
  • 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.

Suggested Citation

  • Andreas C. Drichoutis & Rodolfo M. Nayga & Jayson L. Lusk & Panagiotis Lazaridis, 2012. "When a risky prospect is valued more than its best possible outcome," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(1), pages 1-18, January.
  • Handle: RePEc:jdm:journl:v:7:y:2012:i:1:p:1-18
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    References listed on IDEAS

    as
    1. David M. Grether & James C. Cox, 1996. "The preference reversal phenomenon: Response mode, markets and incentives (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 381-405.
    2. 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.
    3. 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, Oxford University Press, pages 1283-1309.
    4. Jay R. Corrigan & Andreas C. Drichoutis & Jayson L. Lusk & Rodolfo M. Nayga & Matthew C. Rousu, 2012. "Repeated Rounds with Price Feedback in Experimental Auction Valuation: An Adversarial Collaboration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 97-115.
    5. Ondřej Rydval & Andreas Ortmann & Sasha Prokosheva & Ralph Hertwig, 2009. "How certain is the uncertainty effect?," Experimental Economics, Springer;Economic Science Association, pages 473-487.
    6. Lusk,Jayson L. & Shogren,Jason F., 2007. "Experimental Auctions," Cambridge Books, Cambridge University Press, number 9780521671248, December.
    7. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, pages 623-638.
    8. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, pages 902-912.
    9. Gill, David & Stone, Rebecca, 2010. "Fairness and desert in tournaments," Games and Economic Behavior, Elsevier, pages 346-364.
    10. 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, pages 97-109.
    11. 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.
    12. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, pages 623-638.
    13. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutström, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, pages 897-901.
    14. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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    More about this item

    Keywords

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

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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