Aversion to Strategic Uncertainty: Measurement and Policy Implications

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Strategic uncertainty is the uncertainty that players face with respect to the strategies chosen by other players. While economic theory mostly applies equilibrium concepts like Nash or rational expectations equilibria that are based on the absence of strategic uncertainty, experiments show that real decision makers are sensitive to strategic uncertainty. Laboratory experiments have indicated that most humans waive a substantial part of their expected payoff in order to avoid that their payoff depends on the decisions by others, which is called strategic uncertainty aversion. This aversion has far-reaching consequences for economic efficiency, because it implies coordination failures and suboptimal levels of investment and risk-taking in market environments. Our project first aims at developing a method for measuring strategic uncertainty aversion. Our main idea is to elicit the willingness to pay for participating in a game and subjective probabilities for the potential payoffs in this game. The difference between the subjectively expected payoff and the willingness to pay is the amount that a subject is willing to waive for avoiding the respective uncertainty. This defines a premium for strategic uncertainty in a similar vein as the risk premium that measures the difference between a subject’s willingness to pay for participating in a lottery and the expected payoff from that lottery. Secondly, we want to find out how strategic uncertainty aversion is affected by the characteristics of the game, and how it compares to risk aversion and ambiguity aversion in the classical sense. For this, we want to compare premia for strategic uncertainty in different games with risk premia and ambiguity premia (that are defined in a similar way for lotteries without known probabilities). Because strategic uncertainty aversion may lead to inefficient outcomes, our third goal is to analyze by which means strategic uncertainty can be reduced. Here, we want to analyze the policy implications of strategic uncertainty aversion. In particular, we will consider applications to monetary economics and financial crises, where central banks and financial market regulators can change the characteristics of the game. We are also interested in how agents may themselves reduce strategic uncertainty by communication and by acquiring information about what the others know. To this aim, we will especially analyze how different communication channels and information affect the strategic uncertainty premium.To communicate our results and promote research in the field, on top of participating at conferences and publishing our work in highly ranked journals, we plan to organize an international workshop on strategic uncertainty during the second year of the project.