579 Serra Mall
Department of Economics
Stanford, CA 94305
Institutional Affiliation: Stanford University
NBER Working Papers and Publications
|November 2017||Probabilistic States versus Multiple Certainties: The Obstacle of Uncertainty in Contingent Reasoning|
with Muriel Niederle, Emanuel Vespa: w24030
We propose a new hypothesis, the Power of Certainty, to help explain agents' difficulties in making choices when there are multiple possible payoff-relevant states. In the probabilistic ‘Acquiring-a-Company’ problem an agent submits a price to a firm before knowing whether the firm is of low or high value. We construct a deterministic problem with a low and high value firm, where the agent submits a price that is sent to each firm separately. Subjects are much more likely to use dominant strategies in deterministic than in probabilistic problems, even though computations for profit maximization are identical for risk-neutral agents.