What You Don't Know Won't Hurt You: A Laboratory Analysis of Betrayal Aversion

Abstract

Recent research argues “betrayal aversion” leads many people to avoid risk more when a person, rather than nature, determines the outcome of uncertainty. Unfortunately, previous studies conflate betrayal aversion with established preference effects including loss aversion. Using a novel investment-game experiment that varies how strategic uncertainty is resolved, we here provide rigorous evidence on detrimental effects of betrayal aversion. The impact is substantial: holding fixed the probability of betrayal, the possibility of knowing that one has been betrayed reduces investment by about one-third. We suggest emotion-regulation underlies this result and explains the importance of impersonal, institution-mediated exchange in promoting economic efficiency.

JEL Classification: C91, D03, D81