Pricing risk and ambiguity: The effect of perspective taking

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.

Keywords:

• Uncertainty
• Ambiguity
• Risk
• Decision making

Notes

¹ Inclusion of these participants increases the standard errors in our analyses, but it does not qualitatively change any conclusions.

² The Appendix reports results of an additional condition with both a noncomparative evaluation and a within-person perspective.