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How do people cope with an ambiguous situation when it becomes even more ambiguous?

  • Eichberger, Jürgen
  • Oechssler, Jörg
  • Schnedler, Wendelin

As illustrated by the famous Ellsberg paradox, many subjects prefer to bet on events with known rather than with unknown probabilities, i.e., they are ambiguity averse. In an experiment, we examine subjects’ choices when there is an additional source of ambiguity, namely, when they do not know how much money they can win. Using a standard independence assumption, we show that ambiguity averse subjects should continue to strictly prefer the urn with known probabilities. In contrast, our results show that many subjects no longer exhibit such a strict preference. This should have important ramifications for modeling ambiguity aversion.

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Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0528.

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Date of creation: 21 Jun 2012
Date of revision:
Handle: RePEc:awi:wpaper:0528
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  1. James C. Cox & Vjollca Sadiraj & Ulrich Schmidt, 2011. "Paradoxes and Mechanisms for Choice under Risk," Kiel Working Papers 1712, Kiel Institute for the World Economy.
  2. Halevy, Yoram, 2005. "Ellsberg Revisited: an Experimental Study," working papers halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
  3. Schnedler, Wendelin & Dominiak, Adam, 2008. "Uncertainty Aversion and Preference for Randomization," Sonderforschungsbereich 504 Publications 08-39, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  4. Eichberger, Jurgen & Kelsey, David, 1996. "Uncertainty Aversion and Dynamic Consistency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 625-40, August.
  5. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
  6. Eichberger, Jurgen & Kelsey, David, 1996. "Uncertainty Aversion and Preference for Randomisation," Journal of Economic Theory, Elsevier, vol. 71(1), pages 31-43, October.
  7. Dominiak, Adam & Dürsch, Peter & Lefort, Jean-Philippe, 2009. "A Dynamic Ellsberg Urn Experiment," Working Papers 0487, University of Heidelberg, Department of Economics.
  8. Lefort, Jean-Philippe & Chateauneuf, Alain, 2008. "Some Fubini Theorems on product σ-algebras for non-additive measures," Economics Papers from University Paris Dauphine 123456789/7324, Paris Dauphine University.
  9. Christoph Vanberg, 2008. "Why Do People Keep Their Promises? An Experimental Test of Two Explanations -super-1," Econometrica, Econometric Society, vol. 76(6), pages 1467-1480, November.
  10. Cohen, M. & Gilboa, I. & Jaffray, J.Y. & Schmeidler, D., 2000. "An experimental study of updating ambiguous beliefs," Risk, Decision and Policy, Cambridge University Press, vol. 5(02), pages 123-133, June.
  11. : Ebbe Hendon & Hans Jørgen Jacobsen & Birgitte Sloth & Torben Tranæs, 1993. "The Product of Capacities and Belief Functions," Discussion Papers 93-04, University of Copenhagen. Department of Economics.
  12. Eichberger, Jurgen & Grant, Simon & Kelsey, David, 2007. "Updating Choquet beliefs," Journal of Mathematical Economics, Elsevier, vol. 43(7-8), pages 888-899, September.
  13. Sjaak Hurkens & Navin Kartik, 2009. "Would I lie to you? On social preferences and lying aversion," Experimental Economics, Springer, vol. 12(2), pages 180-192, June.
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