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The Rich Domain of Ambiguity Explored

Author

Listed:
  • Zhihua Li

    (Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom)

  • Julia Müller

    (Institute for Organisational Economics, University of Münster, D-48151 Münster, Germany)

  • Peter P. Wakker

    (Erasmus School of Economics, Erasmus University Rotterdam, 3000 DR Rotterdam, Netherlands)

  • Tong V. Wang

    (Erasmus School of Economics, Erasmus University Rotterdam, 3000 DR Rotterdam, Netherlands)

Abstract

Ellsberg and others suggested that decision under ambiguity is a rich empirical domain with many phenomena to be investigated beyond the Ellsberg urns. We provide a systematic empirical investigation of this richness by varying the uncertain events, the outcomes, and combinations of both. Although ambiguity aversion is prevailing, we also find systematic ambiguity seeking, confirming insensitivity. We find that ambiguity attitudes depend on the kind of uncertainty (the source) but not on the kind of outcomes. Ambiguity attitudes are closer to rationality (ambiguity neutrality) for natural uncertainties than for artificial Ellsberg urn uncertainties. This also appears from the reductions of monotonicity violations and of insensitivity. Ambiguity attitudes have predictive power across different outcomes and sources of uncertainty, with individual-specific components. Our rich domain serves well to test families of weighting functions for fitting ambiguity attitudes. We find that two-parameter families, capturing not only aversion but also insensitivity, are desirable for ambiguity even more than for risk. The Goldstein–Einhorn family performed best for ambiguity.

Suggested Citation

  • Zhihua Li & Julia Müller & Peter P. Wakker & Tong V. Wang, 2018. "The Rich Domain of Ambiguity Explored," Management Science, INFORMS, vol. 64(7), pages 3227-3240, July.
  • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:7:p:3227-3240
    DOI: 10.1287/mnsc.2017.2777
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    More about this item

    Keywords

    ambiguity aversion; likelihood insensitivity; pessimism; rationality; fourfold pattern;
    All these keywords.

    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
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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