Title
Decision Making and Trade without Probabilities
Department/School
Accounting
Date of this version
2011
Document Type
Article
DOI
https://doi.org/10.1007/s00199-011-0644-4
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.
Volume
48
Issue
2-3
Published in
Economic Theory
Citation/Other Information
Dickhaut, J., Lunawat, R., Pronin, K., & Stecher, J. (2011). Decision making and trade without probabilities. Economic Theory, 48(2-3), 275–288. https://doi.org/10.1007/s00199-011-0644-4