The Influence of Framing on Willingness to Pay as an Explanation of the Uncertainty Effect

Gneezy, List, and Wu (2006) documented the intriguing uncertainty effect (UE) where risky prospects are valued less than their worst outcome. For example, people are willing to pay an average of $26 for a $50 gift certificate, but only $16 for a lottery that would pay either a $50 or a $100 gift certificate with equal probability. The psychological mechanism underlying this effect is still unknown. Keren and Willemsen (2009) claimed that participants simply misunderstood the instructions in the lottery condition. Simonsohn (2009) carefully ensured participants’ correct understanding and reliably replicated the effect, proposing that the uncertainty effect denotes a direct form of risk aversion. This extreme form of risk aversion appears even more peculiar given that in the marketing domain researchers have documented the opposite. Goldsmith and Amir (2010) examined the effect of uncertainty on promotions and found that risky prospects framed as a free gift could be more attractive than their expected value. Why do people exhibit extreme risk-aversion in the situations examined in the research documenting the UE, but extreme risk-seeking for seemingly closely equivalent risky choices in the domain of consumer research? In a series of 9 studies, we show that framing a risky prospect as a “lottery ticket” as opposed to an “uncertain gift certificate” substantially reduces WTP, because the lottery frame evokes a lower reference price, but people value the risky prospect equally under both frames.