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Pricing risk and ambiguity: The effect of perspective taking

  • Stefan T. Trautmann
  • Ulrich Schmidt

There is a large literature showing that willingness-to-accept (WTA) is usually much higher than willingness-to-pay (WTP) in empirical studies although they should be roughly equal according to traditional economic theory. A second stream of literature shows that people are typically ambiguity averse, i.e. they prefer lotteries with known probabilities over lotteries with unknown ones. Our study combines both streams of literature and analyzes whether there is an interaction between the WTP-WTA disparity and ambiguity aversion

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File URL: https://www.ifw-members.ifw-kiel.de/publications/pricing-risk-and-ambiguity-the-effect-of-perspective-taking/kwp_1727.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1727.

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Length: 14 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:kie:kieliw:1727
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  1. Richard G. Frank & Richard J. Zeckhauser, 2007. "Custom Made Versus Ready to Wear Treatments; Behavioral Propensities in Physician's Choices," NBER Working Papers 13445, National Bureau of Economic Research, Inc.
  2. Zeelenberg, M. & van Dijk, E. & van den Bos, K. & Pieters, R., 2002. "The Inaction Effect in the Psychology of Regret," Other publications TiSEM a29106c0-2319-4f60-b213-8, Tilburg University, School of Economics and Management.
  3. Schmidt, Ulrich & Starmer, Chris & Sugden, Robert, 2008. "Third-generation prospect theory," Open Access Publications from Kiel Institute for the World Economy 28932, Kiel Institute for the World Economy (IfW).
  4. Ulrich Schmidt & Stefan Traub, 2009. "An Experimental Investigation of the Disparity Between WTA and WTP for Lotteries," Theory and Decision, Springer, vol. 66(3), pages 229-262, March.
  5. Mercè Roca & Robin Hogarth & A. Maule, 2006. "Ambiguity seeking as a result of the status quo bias," Journal of Risk and Uncertainty, Springer, vol. 32(3), pages 175-194, May.
  6. Stefan T. Trautmann & Ferdinand M. Vieider & Peter P. Wakker, 2011. "Preference Reversals for Ambiguity Aversion," Management Science, INFORMS, vol. 57(7), pages 1320-1333, July.
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