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Ambiguity, Cognitive Refection, and Strategic Complexity across Auctions

Author

Listed:
  • Cary Deck

    (University of Alabama and Chapman University)

  • Paan Jindapon

    (University of Alabama)

  • Tigran Melkonyan

    (University of Alabama)

  • Mark Schneider

    (University of Alabama)

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.

Suggested Citation

  • Cary Deck & Paan Jindapon & Tigran Melkonyan & Mark Schneider, 2024. "Ambiguity, Cognitive Refection, and Strategic Complexity across Auctions," Working Papers 24-04, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:24-04
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/400/
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    More about this item

    Keywords

    Ambiguity; Ambiguity Attitude; Auctions;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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