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How do people cope with an ambiguous situation when it becomes even more ambiguous?

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  • Eichberger, Jürgen
  • Oechssler, Jörg
  • Schnedler, Wendelin

Abstract

As 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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Bibliographic Info

Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0528.

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Date of creation: 21 Jun 2012
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Handle: RePEc:awi:wpaper:0528

Note: This paper is part of http://archiv.ub.uni-heidelberg.de/volltextserver/view/schriftenreihen/sr-3.html
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Keywords: ambiguity aversion; uncertainty; minmax-expected utility;

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  1. Dominiak, Adam & Duersch, Peter & Lefort, Jean-Philippe, 2012. "A dynamic Ellsberg urn experiment," Games and Economic Behavior, Elsevier, vol. 75(2), pages 625-638.
  2. : Ebbe Hendon & Hans Jørgen Jacobsen & Birgitte Sloth & Torben Tranæs, 1993. "The Product of Capacities and Belief Functions," Discussion Papers 93-04, University of Copenhagen. Department of Economics.
  3. Cohen, M. & Gilboa, I. & Jaffray, J.Y. & Schmeidler, D., 2000. "An experimental study of updating ambiguous beliefs," Risk, Decision and Policy, Cambridge University Press, vol. 5(02), pages 123-133, June.
  4. Eichberger, J. & Kelsey, D., 1993. "Uncertainty Aversion and Dynamic Consistency," Discussion Papers 93-08, Department of Economics, University of Birmingham.
  5. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, 03.
  6. Eichberger, J. & Kelsey, D., 1995. "Uncertainty Aversion and Preferences for Randomisation," Department of Economics - Working Papers Series 476, The University of Melbourne.
  7. James C. Cox & Vjollca Sadiraj & Ulrich Schmidt, 2011. "Paradoxes and Mechanisms for Choice under Risk," Experimental Economics Center Working Paper Series 2011-07, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised May 2012.
  8. Jurgen Eichberger & Simon Grant & David Kelsey, 2006. "Updating Choquet Beliefs," Discussion Papers 0607, Exeter University, Department of Economics.
  9. Schnedler, Wendelin & Dominiak, Adam, 2008. "Uncertainty Aversion and Preference for Randomization," Sonderforschungsbereich 504 Publications 08-39, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  10. Christoph Vanberg, 2008. "Why Do People Keep Their Promises? An Experimental Test of Two Explanations -super-1," Econometrica, Econometric Society, vol. 76(6), pages 1467-1480, November.
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