Decision Making and Trade without Probabilities
Document Type
Article
Publication Date
6-2011
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.
Recommended Citation
Dickhaut, J., Lunawat, R., Pronin, K. and Stecher, J. "Decision Making and Trade without Probabilities." Economic Theory, 48, p. 275-288, June, 2011.
Peer Reviewed
1
Copyright
Springer
Comments
This article was originally published in Economic Theory, volume 48, in 2011.
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