A further exploration of the uncertainty effect
- 716 Downloads
Individual valuation of a binary lottery at values less than the lottery’s worst outcome has been designated as the “uncertainty effect”. Our paper aims to explore the boundary conditions of the uncertainty effect by investigating a plausible underlying process and proposing two possible methods. First, we examine how providing an exogenous evaluation opportunity prior to judging the value of the lottery affects individuals’ judgments, and find that first valuing the worst outcome and then the lottery eliminates the uncertainty effect. Second, we explore whether introducing additional cognitive load dampens how far decision makers correct their initial evaluations, and find that additional cognitive load is able to eliminate the uncertainty effect.
KeywordsBoundary conditions Uncertainty effect Decision under uncertainty
JEL ClassificationD81 C91 D03
We thank the Editors and an anonymous referee for the Journal of Risk and Uncertainty and participants in our seminars for helpful comments. Tianjun Feng is the corresponding author for inquiries on the published paper (TFeng@Fudan.edu.cn). Portions of this work were supported by grants to Yitong Wang for his dissertation on “Decision Research on Time, Risk, and Ambiguity” from a National Science Foundation Dissertation Grant to the University of California, Irvine, and the National Natural Science Foundation of China (Grant 71201091, Grant 71361130017), and Tianjun Feng from the National Natural Science Foundation of China (Grant 70901022, 71371057), the Shanghai Philosophy and Social Science Planning Funds (Grant 2012BGL014), and the Ministry of Education of China (Grant for Overseas-Returnees).
- Einhorn, H. J., & Hogarth, R. M. (1986). Decision making under ambiguity. Journal of Business, 59(4–2), 225–250.Google Scholar
- Gneezy, U., List, J. A., & Wu, G. (2006). The uncertainty effect: when a risky prospect is valued less than its worst outcome. Quarterly Journal of Economics, 121(4), 1283–1309.Google Scholar
- Jones, E. (1990). Interpersonal perception. New York: Freeman.Google Scholar
- Kahneman, D. (1973). Attention and effort. Englewood Cliffs: Prentice Hall.Google Scholar
- Ortmann, A., Prokosheva, A., Rydval, O., & Hertwig, R. (2007). Valuing a risky prospect less than its worst outcome: Uncertainty effect or task ambiguity? Jena Economic Research Paper No. 2007–038; CERGE-EI Working Paper No. 334. Available at SSRN: http://ssrn.com/abstract=1021188.
- von Neumann, J., & Morgenstern, O. (1947). Theory of games and economic behavior (2nd ed.). Princeton: Princeton University Press.Google Scholar