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Comparative Ignorance as an Explanation of Ambiguity Aversion and Ellsberg Choices: A Survey with a New Proposal for Bayesian Training

Author

Listed:
  • Phoebe Koundouri
  • Nikitas Pittis

    (University of Piraeus, Greece)

  • Panagiotis Samartzis

Abstract

Ellsberg-type choices (Ellsberg's paradox) are evidence against the Bayesian theory of Subjective Expected Utility Maximization (SEUM). These choices reflect a particular attitude of the decision maker (DM), namely Ambiguity Aversion (AA). There are two competing interpretations of AA. The first recognizes AA as rational behavior, while the second views AA as a manifestation of a psychological fallacy. This paper focuses on the second interpretation of AA and specifically discusses the most important psychological explanation of AA that has been proposed in the literature, namely Fox and Tversky's (1995) Comparative Ignorance Hypothesis (CIH). CIH holds that AA is mainly a "comparative effect" that occurs when DM feels that he is epistemically inferior for some events of interest compared to others (for which she believes to be epistemically superior). As a result, DM exhibits an aversion towards betting on the epistemically inferior events. The purpose of the paper is twofold: First, to provide a survey of the literature on CIH. Second, to propose a novel "Bayesian Training" (BT) procedure based on "counterfactual thinking". A decision maker who finds BT attractive is likely to move out of the state of comparative ignorance, thereby ceasing to exhibit AA and joining the Bayesian camp.

Suggested Citation

  • Phoebe Koundouri & Nikitas Pittis & Panagiotis Samartzis, 2024. "Comparative Ignorance as an Explanation of Ambiguity Aversion and Ellsberg Choices: A Survey with a New Proposal for Bayesian Training," DEOS Working Papers 2408, Athens University of Economics and Business.
    • Handle: RePEc:aue:wpaper:2408
    as

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    File URL: http://wpa.deos.aueb.gr/docs/2024.Ambiguity.Aversion.Ellsberg.Choices.pdf
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    References listed on IDEAS

    as
    1. Chow, Clare Chua & Sarin, Rakesh K, 2001. "Comparative Ignorance and the Ellsberg Paradox," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 129-139, March.
    2. Enrico Rubaltelli & Rino Rumiati & Paul Slovic, 2010. "Do ambiguity avoidance and the comparative ignorance hypothesis depend on people’s affective reactions?," Journal of Risk and Uncertainty, Springer, vol. 40(3), pages 243-254, June.
    3. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    4. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
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    More about this item

    Keywords

    counterfactual priors; ambiguity; ellsberg paradox;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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