Ambiguity, Cognitive Refection, and Strategic Complexity across Auctions

Cary Deck (), Paan Jindapon (), Tigran Melkonyan () and Mark Schneider ()
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Paan Jindapon: University of Alabama
Mark Schneider: University of Alabama

Working Papers from Chapman University, Economic Science Institute

Abstract: This paper bridges large but separate literatures on decision-making under ambiguity, the dual system framework of behavioral economics, and market design. We characterize behavior under ambiguity arising from dual system preferences. Rational System 2 satisfes the subjective expected utility axioms while behavioral System 1 satisfes the obvious dominance axiom from mechanism design. Our axioms provide a novel foundation for the popular NEO-EU ambiguity model and allow for source dependent ambiguity perceptions. Our approach also provides an explanation as to how behavioral diferences arise between obviously strategy-proof mechanisms (e.g. English auctions) and other mechanisms. Empirically, we fnd ambiguity perceptions are lower for individuals who engage in refective System 2 reasoning. Further, ambiguity perceptions regarding auction prices increase with the mechanism’s strategic complexity (lowest for obviously strategy-proof English auctions, intermediate for strategyproof second-price auctions, highest for non-strategy proof frst-price and Dutch auctions). However, ambiguity attitudes, representing preferences, are stable across auction formats.

Keywords: Ambiguity; Ambiguity Attitude; Auctions (search for similar items in EconPapers)
JEL-codes: C9 D4 D8 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:24-04

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