Probabilistic States Versus Multiple Certainties: the Obstacle of Uncertainty in Contingent Reasoning

65 Pages Posted: 20 Nov 2017 Last revised: 22 Nov 2017

See all articles by Alejandro Martínez-Marquina

Alejandro Martínez-Marquina

Stanford University

Muriel Niederle

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Emanuel Vespa

UC Santa Barbara - Department of Economics

Date Written: November 2017

Abstract

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.

Suggested Citation

Martínez-Marquina, Alejandro and Niederle, Muriel and Vespa, Emanuel, Probabilistic States Versus Multiple Certainties: the Obstacle of Uncertainty in Contingent Reasoning (November 2017). NBER Working Paper No. w24030. Available at SSRN: https://ssrn.com/abstract=3074208

Alejandro Martínez-Marquina (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Muriel Niederle

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Emanuel Vespa

UC Santa Barbara - Department of Economics ( email )

2127 North Hall University of California
Santa Barbara, CA 93117
United States

HOME PAGE: http://https://sites.google.com/site/emanuelvespa/

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