Saturday, July 29, 2017

When Risk Is Weird: Unexplained Transaction Features Lower Valuations

When Risk Is Weird: Unexplained Transaction Features Lower Valuations. Robert Mislavsky and Uri Simonsohn. Management Science,

Abstract: We define transactions as weird when they include unexplained features, that is, features not implicitly, explicitly, or self-evidently justified, and propose that people are averse to weird transactions. In six experiments, we show that risky options used in previous research paradigms often attained uncertainty via adding an unexplained transaction feature (e.g., purchasing a coin flip or lottery), and behavior that appears to reflect risk aversion could instead reflect an aversion to weird transactions. Specifically, willingness to pay drops just as much when adding risk to a transaction as when adding unexplained features. Holding transaction features constant, adding additional risk does not further reduce willingness to pay. We interpret our work as generalizing ambiguity aversion to riskless choice.

Keywords: transaction features, weirdness, risk aversion, ambiguity aversion, uncertainty effect
JEL Classification: D80, M30, M31

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