“Failures in Contingent Reasoning: The Role of Uncertainty,” Muriel Niederle, Stanford University

BEHAVIORAL SCIENCES WORKSHOP

Abstract: Contingent reasoning is ubiquitous and difficult. We provide a new hypothesis - the Power of Certainty - to decompose difficulties with contingent reasoning. When moving from an environment with one state of known value to one where the value of the state is uncertain with a probability distribution over possible values, two changes occur. First, the number of values to consider increases. Second, having more than one value introduces uncertainty. We propose that this lack of certainty, the loss of the Power of Certainty, impedes payoff maximization and show that it accounts for a substantial portion of difficulties with contingent reasoning.

Muriel Niederle is a Professor in the Department of Economics at Stanford University.

The Behavioral Sciences Workshop is cosponsored by the Center for the Study of American Politics (CSAP) and the Yale School of Management’s International Center for Finance and Whitebox Advisors fund. Lunch will be served.