Working Paper: NBER ID: w24030
Authors: Alejandro Martínez-Marquina; Muriel Niederle; Emanuel Vespa
Abstract: We propose a new hypothesis, the Power of Certainty, to help explain agents' difficulties in making choices when there are multiple possible payoff-relevant states. In the probabilistic ‘Acquiring-a-Company’ problem an agent submits a price to a firm before knowing whether the firm is of low or high value. We construct a deterministic problem with a low and high value firm, where the agent submits a price that is sent to each firm separately. Subjects are much more likely to use dominant strategies in deterministic than in probabilistic problems, even though computations for profit maximization are identical for risk-neutral agents.
Keywords: decision-making; uncertainty; behavioral economics; contingent reasoning
JEL Codes: C90; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty of states (D89) | Less optimal decision-making (D91) |
| Deterministic problems (C44) | More frequent profit-maximizing choices (D21) |
| Probabilistic problems (C44) | Less frequent profit-maximizing choices (L21) |
| Power of certainty hypothesis (D81) | Less difficulty in decision-making (D91) |
| Known values of two firms (G32) | Less difficulty compared to uncertain value of one firm (D81) |
| Lack of certainty (D81) | Impacts ability to maximize payoffs (D91) |
| Risk-seeking behavior in probabilistic environments (D81) | Affects pricing strategies (L11) |