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

Author

Listed:
  • Alex Berger

    (University of Sydney)

  • Agnieszka Tymula

    (University of Sydney)

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.

Suggested Citation

  • Alex Berger & Agnieszka Tymula, 2022. "Controlling ambiguity: The illusion of control in choice under risk and ambiguity," Journal of Risk and Uncertainty, Springer, vol. 65(3), pages 261-284, December.
    • Handle: RePEc:kap:jrisku:v:65:y:2022:i:3:d:10.1007_s11166-022-09399-4
    DOI: 10.1007/s11166-022-09399-4
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    More about this item

    Keywords

    Illusion of control; Ambiguity tolerance;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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