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Intuition and Reasoning in Choosing Ambiguous and Risky Lotteries

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  • Ralf Bergheim

    ()

  • Michael W.M. Roos

Abstract

This paper focuses on information acquisition and individual decision making in ambiguous situations and presents a novel experimental design which may help to tackle open questions from a fresh perspective. Instead of giving subjects the choice between risky and ambiguous Ellsberg urns, we let them choose between a safe option and a risky lottery, whose risk is a priori unknown to subjects. By acquiring information about the probability distribution of the lottery’s payoffs, subjects can reduce or even eliminate the ambiguity and turn the decision situation into one of risk. Under the assumption that an ambiguity averse subject should reduce ambiguity within a decision process we predicted that these subjects would request more information. Moreover, we investigate whether the relation between attitudes towards risk and ambiguity is linked to intuitive and deliberate thinking. Based on a detailed analysis of subjects’ information acquisition and decision processes we do not find that those subjects showing ambiguity aversion in an urn experiment based on Halevy (2007) significantly reduce the ambiguity more than others. More intuitive subjects acquire less information and are more likely to avoid the risky lottery. Intuition seems to be negatively correlated with risk aversion, but not with ambiguity aversion. Moreover, we find a positive correlation between risk and ambiguity aversion.

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Bibliographic Info

Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0440.

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Length: 33 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:rwi:repape:0440

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Related research

Keywords: Ambiguity aversion; risk aversion; uncertainty; experiment; decision making; binary system of thinking;

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References

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  1. Butler, Jeff & Guiso, Luigi & Jappelli, Tullio, 2013. "Manipulating Reliance on Intuition Reduces Risk and Ambiguity Aversion," CEPR Discussion Papers 9461, C.E.P.R. Discussion Papers.
  2. Lex Borghans & Bart H.H. Golsteyn & James J. Heckman & Huub Meijers, 2009. "Gender Differences in Risk Aversion and Ambiguity," Working Papers 200903, Geary Institute, University College Dublin.
  3. Matthias Sutter & Martin G. Kocher & Daniela Rützler & Stefan T. Trautmann, 2011. "Impatience and Uncertainty: Experimental Decisions Predict Adolescents' Field Behavior," CESifo Working Paper Series 3635, CESifo Group Munich.
  4. Michèle Cohen & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2011. "An experimental investigation of imprecision attitude and its relation with risk attitude and impatience," Theory and Decision, Springer, vol. 71(1), pages 81-109, July.
  5. Akay, Alpaslan & Martinsson, Peter & Medhin, Haileselassie & Trautmann, Stefan, 2010. "Attitudes Toward Uncertainty Among the Poor: Evidence from Rural Ethiopia," Discussion Papers dp-10-04-efd, Resources For the Future.
  6. Halevy, Yoram, 2005. "Ellsberg Revisited: an Experimental Study," Microeconomics.ca working papers halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
  7. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  8. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  9. Ayala Arad & Ariel Rubinstein, 2012. "Multi-Dimensional Iterative Reasoning in Action: The Case of the Colonel Blotto Game," Levine's Working Paper Archive 786969000000000497, David K. Levine.
  10. Gary Charness & Edi Karni & Dan Levin, 2012. "Ambiguity Attitudes and Social Interactions: An Experimental Investigation," Economics Working Paper Archive 590, The Johns Hopkins University,Department of Economics.
  11. Qiu, Jianying & Weitzel, Utz, 2011. "Reference dependent ambiguity aversion: theory and experiment," MPRA Paper 35289, University Library of Munich, Germany, revised 08 Dec 2011.
  12. repec:hal:journl:halshs-00502820 is not listed on IDEAS
  13. Johanna Etner & Meglena Jeleva & Jean‐Marc Tallon, 2012. "Decision Theory Under Ambiguity," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 234-270, 04.
  14. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
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