The uncertainty effect, also known as direct risk aversion, is a phenomenon from economics and psychology which suggests that individuals may be prone to expressing such an extreme distaste for risk that they ascribe a lower value to a risky prospect (e.g., a lottery for which outcomes and their corresponding probabilities are known) than its worst possible realization.
[1] Additionally, it has been proposed as an explanation for a host of naturalistic behaviors which cannot be explained by dominant models of risky choice, such as the popularity of insurance/extended warranties for consumer products.
List, and George Wu in the early 2000s, though it follows in the footsteps of a large body of work devoted to understanding decision making under risk.
Within this type of schema, individuals are also expected to weight the value (or utility) of each of these discrete outcomes in accordance with the probability that each will occur.
[1][2] Among other explanations, it has been proposed that the uncertainty effect might arise as a consequence of individuals experiencing some form of disutility from risk.
[2] In his follow-up work on the uncertainty effect (or, as he termed it, direct risk aversion), Simonsohn suggested that it might provide an explanation for certain types of responses to risk that cannot be explained by prospect theory and expected utility theory.
One notable example is the widespread popularity of insurance for small-stakes and/or low-probability risks – e.g., warranties for consumer electronics, low-deductible insurance policies, and so on; dominant theories of risky choice do not predict that such products should be popular, and Simonsohn asserted that the uncertainty effect might help to explain why.
[2] In the years after Gneezy, List, and Wu published their findings, several other scholars asserted that the uncertainty effect was simply a consequence of individuals misunderstanding the lottery utilized in initial tests of the uncertainty effect.
[3][4] Such claims were partially refuted by Simonsohn, whose 2009 paper utilized revised lottery instructions, as well as several other successful replications of the uncertainty effect which were published in subsequent years.
[2][5][6][7] Notably, however, in later work with Robert Mislavsky, Simonsohn suggested that the uncertainty effect might be a consequence of aversion to "weird" transaction features as opposed to some form of disutility from risk.
Specifically, they posited that the anomalies associated with the uncertainty effect might not arise as a consequence of distaste for/disutility from risk, but rather, as a consequence of the fact that in most experiments which successfully replicated the uncertainty effect certain outcomes were contrasted to risky prospects described as lotteries, gambles, and the like.
In their work, Mislavsky and Simonsohn systematically explored this notion, and suggest that the aversion to weird transactions may help to provide a more parsimonious explanation for certain failures to replicate the uncertainty effect.