How do people cope with an ambiguous situation when it becomes even more ambiguous?
AbstractAs illustrated by the famous Ellsberg paradox, many subjects prefer to bet on events with known rather than with unknown probabilities, i.e., they are ambiguity averse. In an experiment, we examine subjects’ choices when there is an additional source of ambiguity, namely, when they do not know how much money they can win. Using a standard independence assumption, we show that ambiguity averse subjects should continue to strictly prefer the urn with known probabilities. In contrast, our results show that many subjects no longer exhibit such a strict preference. This should have important ramifications for modeling ambiguity aversion.
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Date of creation: 21 Jun 2012
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ambiguity aversion; uncertainty; minmax-expected utility;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-CBE-2012-07-01 (Cognitive & Behavioural Economics)
- NEP-EVO-2012-07-01 (Evolutionary Economics)
- NEP-EXP-2012-07-01 (Experimental Economics)
- NEP-NEU-2012-07-01 (Neuroeconomics)
- NEP-UPT-2012-07-01 (Utility Models & Prospect Theory)
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