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Probabilistic States versus Multiple Certainties: The Obstacle of Uncertainty in Contingent Reasoning

Alejandro Martínez-Marquina, Muriel Niederle, Emanuel Vespa

NBER Working Paper No. 24030
Issued in November 2017
NBER Program(s):Technical Working Papers

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.

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Document Object Identifier (DOI): 10.3386/w24030

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