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Zooming In On Ambiguity Attitudes

Author

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  • Aurélien Baillon
  • Aysil Emirmahmutoglu

Abstract

Empirical studies of ambiguity attitudes to date have focused on events of moderate likelihood. Extrapolation to rare events requires caution. In an Ellsberg‐like experiment with very unlikely events, we measured ambiguity attitudes with neither assumptions on subjects' beliefs nor restrictions to specific ambiguity models. Very unlikely events were overweighted, being weighted more strongly in isolation than when part of larger events. Using latent profile analysis, we classified the subjects in terms of deviations from ambiguity neutrality. One third behaved close to ambiguity neutrality. The others exhibited overweighting of rare events. Such behavior can lead to money‐pump situations.

Suggested Citation

  • Aurélien Baillon & Aysil Emirmahmutoglu, 2018. "Zooming In On Ambiguity Attitudes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 2107-2131, November.
    • Handle: RePEc:wly:iecrev:v:59:y:2018:i:4:p:2107-2131
    DOI: 10.1111/iere.12331
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    Cited by:

    1. Lu Li & Richard Peter, 2021. "Should we do more when we know less? The effect of technology risk on optimal effort," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(3), pages 695-725, September.
    2. Masaki Aoyagi & Takehito Masuda & Naoko Nishimura, 2021. "Strategic Uncertainty and Probabilistic Sophistication," ISER Discussion Paper 1117, Institute of Social and Economic Research, Osaka University.
    3. Cathleen Johnson & Aurélien Baillon & Han Bleichrodt & Zhihua Li & Dennie Dolder & Peter P. Wakker, 2021. "Prince: An improved method for measuring incentivized preferences," Journal of Risk and Uncertainty, Springer, vol. 62(1), pages 1-28, February.
    4. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.

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