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How Certain Is the Uncertainty Effect?

Author

Listed:
  • Ondrej Rydval
  • Andreas Ortmann
  • Sasha Prokosheva
  • Ralph Hertwig

Abstract

We replicate three pricing tasks of Gneezy, List and Wu (2006) for which they document the so-called uncertainty effect, namely, that people value a binary lottery over non-monetary outcomes less than other people value the lottery’s worse outcome. While the authors implemented a verbal lottery description, we use a physical lottery format which makes misinterpretation of the lottery structure highly unlikely. We also provide subjects with complete information about the goods they are to value (book gift certificates and one-year deferred payments). Contrary to Gneezy et al. (2006), we observe for all three pricing tasks that subjects’ willingness to pay for the lottery is significantly higher than other subjects’ willingness to pay for the lottery’s worse outcome.

Suggested Citation

  • 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 - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp385
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    References listed on IDEAS

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    1. repec:feb:framed:0074 is not listed on IDEAS
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    Cited by:

    1. Chaikal Nuryakin & Alistair Munro, 2019. "Experiments on lotteries for shrouded and bundled goods: Investigating the economics of fukubukuro," The Japanese Economic Review, Japanese Economic Association, vol. 70(2), pages 168-188, June.
    2. Uri Benzion & Shosh Shahrabani & Tal Shavit, 2013. "Retesting The Uncertainty Effect Using Lotteries With Real Products And Money," Bulletin of Economic Research, Wiley Blackwell, vol. 65, pages 175-186, May.
    3. James Andreoni & Charles Sprenger, 2011. "Uncertainty Equivalents: Testing the Limits of the Independence Axiom," NBER Working Papers 17342, National Bureau of Economic Research, Inc.
    4. Vincent Meisner & Jonas von Wangenheim, 2022. "Loss aversion in strategy-proof school-choice mechanisms," Papers 2207.14666, arXiv.org.
    5. Bnaya Dreyfuss & Ori Heffetz & Matthew Rabin, 2019. "Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms," NBER Working Papers 26394, National Bureau of Economic Research, Inc.
    6. Heiko Karle & Heiner Schumacher & Rune Vølund, 2020. "Consumer search and the uncertainty effect," Working Papers of Department of Economics, Leuven 657766, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    7. 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, President and Fellows of Harvard College, vol. 121(4), pages 1283-1309.
    8. Honda, Hidehito & Ogawa, Midori & Murakoshi, Takuma & Masuda, Tomohiro & Utsumi, Ken & Park, Sora & Kimura, Atsushi & Nei, Daisuke & Wada, Yuji, 2015. "Effect of visual aids and individual differences of cognitive traits in judgments on food safety," Food Policy, Elsevier, vol. 55(C), pages 33-40.
    9. Meisner, Vincent & von Wangenheim, Jonas, 2019. "School Choice and Loss Aversion," Rationality and Competition Discussion Paper Series 208, CRC TRR 190 Rationality and Competition.
    10. Pavlo R. Blavatskyy, 2011. "A Model of Probabilistic Choice Satisfying First-Order Stochastic Dominance," Management Science, INFORMS, vol. 57(3), pages 542-548, March.
    11. Meisner, Vincent & von Wangenheim, Jonas, 2023. "Loss aversion in strategy-proof school-choice mechanisms," Journal of Economic Theory, Elsevier, vol. 207(C).
    12. Yitong Wang & Tianjun Feng & L. Keller, 2013. "A further exploration of the uncertainty effect," Journal of Risk and Uncertainty, Springer, vol. 47(3), pages 291-310, December.
    13. Camilleri, Adrian R. & Dankova, Katarina & Ortiz, Jose M. & Neelim, Ananta, 2023. "Increasing worker motivation using a reward scheme with probabilistic elements," Organizational Behavior and Human Decision Processes, Elsevier, vol. 177(C).
    14. Jonathan E. Alevy & Craig E. Landry & John A. List, 2015. "Field Experiments On The Anchoring Of Economic Valuations," Economic Inquiry, Western Economic Association International, vol. 53(3), pages 1522-1538, July.
    15. Klaus Glenk & Sergio Colombo, 2013. "Modelling outcome-related risk in choice experiments," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(4), pages 559-578, October.
    16. Robert Mislavsky & Uri Simonsohn, 2018. "When Risk Is Weird: Unexplained Transaction Features Lower Valuations," Management Science, INFORMS, vol. 64(11), pages 5395-5404, November.
    17. Chuang, Yating & Schechter, Laura, 2015. "Stability of experimental and survey measures of risk, time, and social preferences: A review and some new results," Journal of Development Economics, Elsevier, vol. 117(C), pages 151-170.
    18. Kircher, Philipp & Sandroni, Alvaro & Ludwig, Sandra, 2009. "Fairness: A Critique to the Utilitarian Approach," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 288, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    19. Fabrice Lec & Serge Macé, 2018. "The curse of hope," Theory and Decision, Springer, vol. 84(3), pages 429-451, May.
    20. Andreas Ortmann, 2009. ""The Way in which an Experiment is Conducted is Unbelievably Important": On the Experimentation Practices of Economists and Psychologists," CESifo Working Paper Series 2887, CESifo.
    21. Sasha Prokosheva, 2014. "Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills," CERGE-EI Working Papers wp525, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    22. George E. Newman & Daniel Mochon, 2012. "Why are lotteries valued less? Multiple tests of a direct risk-aversion mechanism," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(1), pages 19-24, January.
    23. Drichoutis, Andreas C. & Nayga, Rodolfo M. & Lusk, Jayson L. & Lazaridis, Panagiotis, 2012. "When a risky prospect is valued more than its best possible outcome," Judgment and Decision Making, Cambridge University Press, vol. 7(1), pages 1-18, January.
    24. Pavlo Blavatskyy, 2012. "Probabilistic choice and stochastic dominance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(1), pages 59-83, May.
    25. Naveh Eskinazi & Tal Shavit & Mosi Rosenboim & Miki Malul, 2024. "Behavioral biases in short selling—An experimental study," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(2), pages 748-757, March.

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    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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