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Testing ambiguity theories with a mean‐preserving design

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  • Chun‐Lei Yang
  • Lan Yao

Abstract

Prominent models such as maxmin expected utility/alpha‐multiprior (MEU/ α‐MP) and Klibanoff, Marinacci, and Mukerji (KMM) interpret ambiguity aversion as aversion against second‐order risks associated with ambiguous acts. We design an experiment where the decision maker draws twice with replacement in the typical Ellsberg two‐color urns, but with a different color winning each time. Given this set of mean‐preserving prospects, MEU/α‐MP, KMM, and Savage's subjective expected utility all predict unequivocally that risk‐averse decision makers (DMs) will avoid the 50–50 urn that exhibits the highest risk conceivable, while risk‐seeking DMs do the opposite. However, we observe a substantial number of violations in the experiments. It appears that the ambiguity premium is partially paid to avoid the ambiguity issue per se, which is distinct from notions of second‐order risk. This finding is robust even when there is only partial ambiguity, and is applicable to all models that satisfy a monotonicity condition.

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  • Chun‐Lei Yang & Lan Yao, 2017. "Testing ambiguity theories with a mean‐preserving design," Quantitative Economics, Econometric Society, vol. 8(1), pages 219-238, March.
    • Handle: RePEc:wly:quante:v:8:y:2017:i:1:p:219-238
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    Cited by:

    1. Christoph Kuzmics & Brian W. Rogers & Xiannong Zhang, 2019. "Is Ellsberg behavior evidence of ambiguity aversion?," Graz Economics Papers 2019-07, University of Graz, Department of Economics.
    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. Brian Jabarian & Simon Lazarus, 2023. "A Two-Ball Ellsberg Paradox," CESifo Working Paper Series 10745, CESifo.

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