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Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence

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  • Yang, Chun-Lei
  • Yao, Lan
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    Abstract

    We study the two-color problem by Ellsberg (1961) with the modification that the decision maker draws twice with replacement and a different color wins in each draw. The 50-50 risky urn turns out to have the highest risk conceivable among all prospects including the ambiguous one, while all feasible color distributions are mean-preserving spreads to one another. We show that the well-known second-order sophisticated theories like MEU, CEU, and REU as well as Savage’s first-order theory of SEU share the same predictions in our design, for any first-order risk attitude. Yet, we observe that substantial numbers of subjects violate the theory predictions even in this simple design.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28531.

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    Date of creation: 22 Jan 2011
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    Handle: RePEc:pra:mprapa:28531

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    Keywords: Ellsberg paradox; Ambiguity; Second-order risk; Second-order preference theory; Experiment;

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    1. Yoram Halevy & Vincent Feltkamp, . "A Bayesian Approach to Uncentainty Aversion," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 99-03, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    2. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 585-603, August.
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    7. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
    8. Ramon Casadesus-Masanell & Peter Klibanoff & Emre Ozdenoren, 1998. "Maximum Expected Utility over Savage Acts with a Set of Priors," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1218, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. Kyoungwon Seo, 2009. "Ambiguity and Second-Order Belief," Econometrica, Econometric Society, Econometric Society, vol. 77(5), pages 1575-1605, 09.
    10. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    11. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 325-70, October.
    12. Segal, Uzi, 1987. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 175-202, February.
    13. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 4(1), pages 5-28, January.
    14. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
    15. Casadesus-Masanell, Ramon & Klibanoff, Peter & Ozdenoren, Emre, 2000. "Maxmin Expected Utility over Savage Acts with a Set of Priors," Journal of Economic Theory, Elsevier, Elsevier, vol. 92(1), pages 35-65, May.
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