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Eliciting ambiguity aversion in unknown and in compound lotteries: A KMM experimental approach

Author

Listed:
  • Noemi Pace

    (Department of Economics, University Of Venice C� Foscari)

  • Giuseppe Attanasi

    (University of Strasbourg)

  • Christian Gollier

    (Toulouse School of Economics)

  • Aldo Montesano

    (Bocconi University, Milan)

Abstract

We define coherent-ambiguity aversion within the Klibanoff, Marinacci and Mukerji (2005) smooth ambiguity model (henceforth KMM) as the combination of choice-ambiguity aversion and value-ambiguity aversion. We analyze theoretically five ambiguous decision tasks, where a subject faces two-stage lotteries with binomial, uniform or unknown second-order probabilities. We check our theoretical predictions through a 10-task laboratory experiment. In (unambiguous) tasks 1-5, we elicit risk aversion both through a portfolio choice method and through a BDM mechanism. In (ambiguous) tasks 6-10, we elicit choice-ambiguity aversion through the portfolio choice method and value-ambiguity aversion through the BDM mechanism. We find that more than 75% of classified subjects behave according to the KMM model in all tasks 6-10, independent of their degree of risk aversion. Further, the percentage of coherently-ambiguity-averse subjects is lower in the binomial than in the uniform and in the unknown treatment, with only the latter difference being significant. Finally, highly-risk-averse subjects are more prone to coherent-ambiguity.

Suggested Citation

  • Noemi Pace & Giuseppe Attanasi & Christian Gollier & Aldo Montesano, 2012. "Eliciting ambiguity aversion in unknown and in compound lotteries: A KMM experimental approach," Working Papers 2012_23, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2012_23
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    More about this item

    Keywords

    coherent-ambiguity aversion; value-ambiguity aversion; choice-ambiguity aversion; smooth ambiguity model; binomial distribution; uniform distribution; unknown urn.;
    All these keywords.

    JEL classification:

    • 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
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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