Pricing risk and ambiguity

The effect of perspective taking

S.T. Trautmann, U. Schmidt

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In the valuation of uncertain prospects, a difference is often observed between selling and buying perspectives. This paper distinguishes between risk (known probabilities) and ambiguity (unknown probabilities) in decisions under uncertainty and shows that the valuation disparity increases under ambiguity compared to risk. It is found that both the comparative versus noncomparative evaluation of risky and ambiguous prospects and the uniqueness of the valuation perspective (either seller or buyer) moderate this increase in the disparity under ambiguity. The finding is consistent with recent theoretical accounts of pricing under uncertainty. We discuss implications for market behaviour and for the ambiguity paradigm as a research tool.
Original languageEnglish
Pages (from-to)195-205
JournalThe Quarterly Journal of Experimental Psychology
Volume65
Issue number1
DOIs
Publication statusPublished - 2012

Cite this

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Pricing risk and ambiguity : The effect of perspective taking. / Trautmann, S.T.; Schmidt, U.

In: The Quarterly Journal of Experimental Psychology, Vol. 65, No. 1, 2012, p. 195-205.

Research output: Contribution to journalArticleScientificpeer-review

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AB - In the valuation of uncertain prospects, a difference is often observed between selling and buying perspectives. This paper distinguishes between risk (known probabilities) and ambiguity (unknown probabilities) in decisions under uncertainty and shows that the valuation disparity increases under ambiguity compared to risk. It is found that both the comparative versus noncomparative evaluation of risky and ambiguous prospects and the uniqueness of the valuation perspective (either seller or buyer) moderate this increase in the disparity under ambiguity. The finding is consistent with recent theoretical accounts of pricing under uncertainty. We discuss implications for market behaviour and for the ambiguity paradigm as a research tool.

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JF - The Quarterly Journal of Experimental Psychology

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