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Economic Theory

, Volume 48, Issue 2–3, pp 275–288 | Cite as

Decision making and trade without probabilities

  • John Dickhaut
  • Radhika Lunawat
  • Kira Pronin
  • Jack StecherEmail author
Symposium

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 lemons problem 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 Winners’ curse Market for lemons Price formation Auctions 

JEL Classification

D44 D82 D83 G12 

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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  • John Dickhaut
    • 1
  • Radhika Lunawat
    • 2
  • Kira Pronin
    • 3
  • Jack Stecher
    • 4
    Email author
  1. 1.George L. Argyros School of BusinessChapman UniversityOrangeUSA
  2. 2.The University of St. Thomas, Opus College of BusinessMinneapolisUSA
  3. 3.Graduate School of Public and International Affairs, University of PittsburghPittsburghUSA
  4. 4.Tepper School of Business, Carnegie Mellon UniversityPittsburghUSA

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