Controlling ambiguity: The illusion of control in choice under risk and ambiguity

Alex Berger and Agnieszka Tymula
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Alex Berger: University of Sydney

Journal of Risk and Uncertainty, 2022, vol. 65, issue 3, No 2, 284 pages

Abstract: Abstract The illusion of control occurs when individuals believe that exerting objectively meaningless control over pure chance events increases their probability of success. In economics, the illusion of control has only ever been studied in choice under risk, where probability distributions are known, and has been found to have no effect. This contrasts with studies in psychology, which have found a persistent positive effect. The cause of these conflicting findings may be that the illusion of control only affects risk taking in choice under ambiguity, where probability distributions are fully or partially unknown. To address this gap in the literature, we conducted an incentive compatible laboratory experiment which induced the illusion of control in some participants. We find that the illusion of control does not affect choice under risk but increases ambiguity tolerance. These results bridge the gap between the psychology and economics literature, emphasizing the importance of distinguishing risk from ambiguity. Our results suggest that some studies may unintentionally induce an illusion of control and over-estimate ambiguity tolerance.

Keywords: Illusion of control; Ambiguity tolerance (search for similar items in EconPapers)
JEL-codes: C91 D01 D81 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11166-022-09399-4

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