Effects of ambiguity in market experiments

Article Abstract:

The effects of ambiguity on individuals'decisions in market settings is examined. According to previous research, individuals are averse to ambiguity, which in market settings is manifested in participants' decisions influencing each other. Prediction of the market price in this situation is analyzed through experiments involving two market organizations, the double oral auction and the sealed bid auction, and bank executives and graduate business students as subjects. The results indicate that prices and bids for lotteries with ambiguous probabilities are lower than those for equivalent but unambiguous lotteries. Thus, ambiguity persists even in the presence of market feedback and incentives. These findings are useful inbidding situations wherein lack of information or experience causes ambiguity in probability in the object of sale.

Pricing

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Prospect versus utility

Article Abstract:

The prospect model of decision making under risk for an individual has been compared to a utility model on the criteria of predictive accuracy and the postulates of each model. Experimental results show that for nonparadoxical situations the difference in the predictive ability for the two models is small. Results also indicate that the prospect model had more predictive accuracy than the utility model for paradoxical choices, and that the postulates of both models had a high degree of consistency.

Marketing research, Market research, Consumer behavior

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Lottery dependent utility

Article Abstract:

A model is proposed for decision-making when risk capable of predicting empirically observed preference patterns is in place. The model differs from early expected utility models in that it permits utilities to depend on a lottery. Utility dependence on the lottery is reached by restricting the utility measure to a parametric function family. The basic use of the model is in predictive or descriptive applications and research.

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