Document Type

Article

Publication Date

3-5-2024

Abstract

This paper bridges large but separate literatures on decision-making under ambiguity, the dual system framework of behavioral economics, and market design. We characterize behavior under ambiguity arising from dual system preferences. Rational System 2 satisfies the subjective expected utility axioms while behavioral System 1 satisfies the obvious dominance axiom from mechanism design. Our axioms provide a novel foundation for the popular NEO-EU ambiguity model and allow for source dependent ambiguity perceptions. Our approach also provides an explanation as to how behavioral differences arise between obviously strategy-proof mechanisms (e.g. English auctions) and other mechanisms. Empirically, we find ambiguity perceptions are lower for individuals who engage in reflective System 2 reasoning. Further, ambiguity perceptions regarding auction prices increase with the mechanism’s strategic complexity (lowest for obviously strategy-proof English auctions, intermediate for strategy-proof second-price auctions, highest for non-strategy proof first-price and Dutch auctions). However, ambiguity attitudes, representing preferences, are stable across auction formats.

Comments

ESI Working Paper 24-04

Formerly titled "Ambiguity and Ambiguity Attitudes across Auctions"

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