Ellsberg Re-Revisited: An Experiment Disentangling Model Uncertainty and Risk Aversion (original) (raw)
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Journal of Economic Behavior & Organization, 2020
We report the results of an experiment eliciting individuals' attitudes toward risk and model uncertainty. Using a joint elicitation procedure, we then precisely quantify the strength of individuals' attitude toward ambiguity in the context of the smooth model and characterize its main properties. Our results provide empirical evidence of decreasing absolute ambiguity aversion (DAAA) and constant relative ambiguity aversion (CRAA). These results shed new light on the way ambiguity attitudes may affect important decisions, such as the choice of health insurance policies or the optimal investment strategy in the face of climate change.
Review of Economics and Statistics
We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty, entailing different degrees of complexity, from subjects with different sophistication levels. We show that (1) ambiguity aversion is robust to sophistication, but the strong relationship previously reported between attitudes toward ambiguity and compound risk is not. (2) Ellsberg ambiguity attitude can be partly explained by attitudes toward complexity for less sophisticated subjects only. Overall, regardless of the subject's sophistication level, the main driver of Ellsberg ambiguity attitude is a specific treatment of unknown probabilities.
Ambiguity and compound risk attitudes: an experiment
The identification of compound risk attitudes and ambiguity attitudes has recently received experimental support (Halevy, 2007) and been incorporated in decision models (Seo, 2009; Halevy and Ozdenoren, 2008; Segal, 1987). Non reduction of compound lotteries is this literature’s explanation of Ellsberg type behavior. We conduct an experiment measuring individual behavior under simple risk, under various types of compound risk and under ambiguity. We examine how each of these behaviors changes as the probability (or size) of the winning event varies. We find that attitudes towards all three types of uncertainties move from seeking to aversion as the probability level increases. Controlling for probability level, we find that the link between ambiguity and compound risk attitudes is partial and sensitive to the type of compound risk considered. We do not support the equivalence between reduction of these compound risks and ambiguity neutrality.
Hopes and Fears: the Conflicting Effects of Risk Ambiguity
Theory and Decision, 1999
The Ellsberg Paradox documented the aversion to ambiguity in the probability of winning a prize. Using an original sample of 266 business owners and managers facing risks from climate change, this paper documents the presence of departures from rationality in both directions. Both ambiguity-seeking behavior and ambiguity-averse behavior are evident. People exhibit 'fear' effects of ambiguity for small probabilities of suffering a loss and 'hope' effects for large probabilities. Estimates of the crossover point from ambiguity aversion (fear) to ambiguity seeking (hope) place this value between 0.3 and 0.7 for the risk per decade lotteries considered, with empirical estimates indicating a crossover mean risk of about 0.5. Attitudes toward the degree of ambiguity also reverse at the crossover point.
Are Policymakers Ambiguity Averse?*
The Economic Journal, 2019
We investigate the ambiguity preferences of a unique sample of real-life policymakers at the Paris UN climate conference (COP21). We find that policymakers are generally ambiguity averse. Using a simple design, we are moreover able to show that these preferences are not necessarily due to an irrational behavior, but rather to intrinsic preferences over unknown probabilities. Exploring the heterogeneity within our sample, we also show that the country of origin and the degree of quantitative sophistication affect policymakers’ attitudes towards compound risk, but not towards ambiguity. Robustness results are obtained in a lab experiment with a sample of university students.
Economic Theory Series Editor : Matteo Manera Three Layers of Uncertainty : an Experiment
2018
We experimentally explore decision-making under uncertainty using a framework that decomposes uncertainty into three distinct layers: (1) physical uncertainty, entailing inherent randomness within a given probability model, (2) model uncertainty, entailing subjective uncertainty about the probability model to be used and (3) model misspecification, entailing uncertainty about the presence of the true probability model among the set of models considered. Using a new experimental design, we measure individual attitudes towards these different layers of uncertainty and study the distinct role of each of them in characterizing ambiguity attitudes. In addition to providing new insights into the underlying processes behind ambiguity aversion –failure to reduce compound probabilities or distinct attitudes towards unknown probabilities– our study provides the first empirical evidence for the intermediate role of model misspecification between model uncertainty and Ellsberg in decision-makin...
Estimating aversion to uncertainty
2009
It is intuitive that decision-makers might have attitudes towards uncertainty just as they might have attitudes towards risk. However, it is only recently that this intuitive notion has been formalized and axiomatically characterized. We estimate the extent of uncertainty aversion in a manner that is parsimonious and consistent with theory. We demonstrate that one can jointly estimate attitudes towards uncertainty, attitudes towards risk, and subjective probabilities in a rigorous manner. Our structural econometric model constructively demonstrates the theoretical claims that it is possible to define uncertainty aversion in an empirically tractable manner. Our results show that attitudes towards risk and uncertainty can be different, qualitatively and quantitatively, and that allowing for these differences can have significant effects on inferences about subjective probabilities.
Journal of Risk and Uncertainty, 2012
Experimental results on the Ellsberg paradox typically reveal behavior that is commonly interpreted as ambiguity aversion. The experiments reported in the current paper find the objective probabilities for drawing a red ball that make subjects indifferent between various risky and uncertain Ellsberg bets. They allow us to examine the predictive power of alternative principles of choice under uncertainty, including the objective maximin and Hurwicz criteria, the sure-thing principle, and the principle of insufficient reason. Contrary to our expectations, the principle of insufficient reason performed substantially better than rival theories in our experiment, with ambiguity aversion appearing only as a secondary phenomenon.
Three Layers of Uncertainty: An Experiment
SSRN Electronic Journal, 2018
We experimentally explore decision-making under uncertainty using a framework that decomposes uncertainty into three distinct layers: (1) physical uncertainty, entailing inherent randomness within a given probability model, (2) model uncertainty, entailing subjective uncertainty about the probability model to be used and (3) model misspecification, entailing uncertainty about the presence of the true probability model among the set of models considered. Using a new experimental design, we measure individual attitudes towards these different layers of uncertainty and study the distinct role of each of them in characterizing ambiguity attitudes. In addition to providing new insights into the underlying processes behind ambiguity aversion-failure to reduce compound probabilities or distinct attitudes towards unknown probabilities-our study provides the first empirical evidence for the intermediate role of model misspecification between model uncertainty and Ellsberg in decision-making under uncertainty.