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The strength of sensitivity to ambiguity

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Listed:
  • Robin Cubitt

    () (University of Nottingham)

  • Gijs Kuilen

    () (Tilburg University)

  • Sujoy Mukerji

    () (Queen Mary University of London)

Abstract

We report an experiment where each subject’s ambiguity sensitivity is measured by an ambiguity premium, a concept analogous to and comparable with a risk premium. In our design, some tasks feature known objective risks and others uncertainty about which subjects have imperfect, heterogeneous, information (“ambiguous tasks”). We show how the smooth ambiguity model can be used to calculate ambiguity premia. A distinctive feature of our approach is estimation of each subject’s subjective beliefs about the uncertainty in ambiguous tasks. We find considerable heterogeneity among subjects in beliefs and ambiguity premia; and that, on average, ambiguity sensitivity is about as strong as risk sensitivity.

Suggested Citation

  • Robin Cubitt & Gijs Kuilen & Sujoy Mukerji, 2018. "The strength of sensitivity to ambiguity," Theory and Decision, Springer, vol. 85(3), pages 275-302, October.
  • Handle: RePEc:kap:theord:v:85:y:2018:i:3:d:10.1007_s11238-018-9657-9
    DOI: 10.1007/s11238-018-9657-9
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    References listed on IDEAS

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    Cited by:

    1. Attanasi, Giuseppe Marco & D'Albis, Hippolyte & Thibault, Emmanuel, 2018. "An Experimental Test of the Under-Annuitization Puzzle with Smooth Ambiguity and Charitable Giving," TSE Working Papers 18-932, Toulouse School of Economics (TSE).
    2. Oechssler, Jörg & Rau, Hannes & Roomets, Alex, 2019. "Hedging, ambiguity, and the reversal of order axiom," Games and Economic Behavior, Elsevier, vol. 117(C), pages 380-387.

    More about this item

    Keywords

    Ambiguity sensitivity; Ambiguity attitude; Measuring strength of ambiguity sensitivity; Smooth ambiguity model; Ambiguity premium;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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