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

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

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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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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  1. 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.
  2. Sungwon Cho & Cannon Koo & John List & Changwon Park & Pablo Polo & Jason Shogren & Robert Wilhelmi, 2001. "Auction mechanisms and the measurement of WTP and WTA," Natural Field Experiments 00516, The Field Experiments Website.
  3. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 69(4), pages 623-38, September.
  4. David Gill & Rebecca Stone, 2006. "Fairness and Desert in Tournaments," Economics Series Working Papers 279, University of Oxford, Department of Economics.
  5. David J. Cooper & Hanming Fang, 2006. "Understanding Overbidding in Second Price Auctions: An Experimental Study," Cowles Foundation Discussion Papers 1557, Cowles Foundation for Research in Economics, Yale University.
  6. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutström, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
  7. 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), vol. 7(3), pages 381-405.
  8. 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, vol. 121(4), pages 1283-1309.
  9. Ondřej Rydval & Andreas Ortmann & Sasha Prokosheva & Ralph Hertwig, 2009. "How certain is the uncertainty effect?," Experimental Economics, Springer;Economic Science Association, vol. 12(4), pages 473-487, December.
  10. 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.
  11. 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.
  12. 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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