Decision Making and Trade Without Probabilities

Posted: 7 Nov 2006 Last revised: 5 Nov 2012

See all articles by John W. Dickhaut

John W. Dickhaut

Chapman University (Deceased)

Radhika Lunawat

University of California, Irvine - Accounting Area

Kira Pronin

University of Pittsburgh, Kenneth P. Dietrich School of Arts and Sciences, Department of Political Science

Jack Douglas Stecher

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: December 1, 2006

Abstract

This paper studies trade in a first-price sealed bid auction where agents know only a range of possible payoffs. The setting is one in which a winner’s curse arises, so that if agents have common risk preferences and common priors, then expected utility theory leads to a prediction of no trade. In contrast, we develop a model of rational non-probabilistic decision making, under which trade can occur because not bidding is a weakly dominated strategy. We use a laboratory experiment to test the predictions of both models, and also of models of expected utility with heterogeneous priors and risk preferences. We find strong support for the rational non-probabilistic model.

Keywords: Knightian uncertainty, ambiguity, price formation, auctions

JEL Classification: D80, D82, D83

Suggested Citation

Dickhaut, John and Lunawat, Radhika and Pronin, Kira and Stecher, Jack Douglas, Decision Making and Trade Without Probabilities (December 1, 2006). Economic Theory, 2011, Volume 47, Numbers 2-3, pages 275-288, Available at SSRN: https://ssrn.com/abstract=942767

John Dickhaut

Chapman University (Deceased)

Radhika Lunawat

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Kira Pronin

University of Pittsburgh, Kenneth P. Dietrich School of Arts and Sciences, Department of Political Science ( email )

Pittsburgh, PA
United States

HOME PAGE: http://www.scandipolitics.com

Jack Douglas Stecher (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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