2127 North Hall
University of California
Santa Barbara, CA 93106
Institutional Affiliation: University of California at Santa Barbara
NBER Working Papers and Publications
|November 2017||Probabilistic States versus Multiple Certainties: The Obstacle of Uncertainty in Contingent Reasoning|
with Alejandro Martínez-Marquina, Muriel Niederle: 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.