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The uncertainty triangle – Uncovering heterogeneity in attitudes towards uncertainty

Author

Listed:
  • Daniel R. Burghart

    () (California State University Sacramento)

  • Thomas Epper

    () (University of St. Gallen
    University of Zürich)

  • Ernst Fehr

    () (University of Zürich)

Abstract

This paper develops a graphical tool – the uncertainty triangle – that allows for testing whether choices under uncertainty obey the generalized axiom of revealed preference (GARP). We find that more than 95% of subjects made choices that can be rationalized by the maximization of a well-behaved utility function. The uncertainty triangle also makes it straightforward to characterize heterogeneity in attitudes towards uncertainty. To accomplish this we propose a one-parameter extension of Expected Utility in which uncertainty attitude is everywhere constant in the triangle. Experimental data indicate that about 60% of participants made choices consistent with the model and, within this group, 48% were uncertainty averse, 22% uncertainty seeking, and 30% uncertainty neutral. The remaining 40% of participants appear to hold variable uncertainty attitudes. A model that can accommodate this variability is proposed and calibrated.

Suggested Citation

  • Daniel R. Burghart & Thomas Epper & Ernst Fehr, 2020. "The uncertainty triangle – Uncovering heterogeneity in attitudes towards uncertainty," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 125-156, April.
  • Handle: RePEc:kap:jrisku:v:60:y:2020:i:2:d:10.1007_s11166-020-09331-8
    DOI: 10.1007/s11166-020-09331-8
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    References listed on IDEAS

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