IDEAS home Printed from https://ideas.repec.org/p/awi/wpaper/0528.html
   My bibliography  Save this paper

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

Author

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

Abstract

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.

Suggested Citation

  • Eichberger, Jürgen & Oechssler, Jörg & Schnedler, Wendelin, 2012. "How do people cope with an ambiguous situation when it becomes even more ambiguous?," Working Papers 0528, University of Heidelberg, Department of Economics.
    • Handle: RePEc:awi:wpaper:0528
    Note: This paper is part of http://archiv.ub.uni-heidelberg.de/volltextserver/view/schriftenreihen/sr-3.html
    as

    Download full text from publisher

    File URL: http://nbn-resolving.de/urn/resolver.pl?urn=urn:nbn:de:bsz:16-opus-134394
    File Function: Frontdoor page on HeiDOK
    Download Restriction: no
    File URL: https://archiv.ub.uni-heidelberg.de/volltextserver/13439/1/Eichberger_Oechssler_Schnedler_dp528.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dominiak, Adam & Duersch, Peter & Lefort, Jean-Philippe, 2012. "A dynamic Ellsberg urn experiment," Games and Economic Behavior, Elsevier, vol. 75(2), pages 625-638.
    2. Hendon, Ebbe & Jacobsen, Hans Jorgen & Sloth, Birgitte & Tranaes, Torben, 1996. "The product of capacities and belief functions," Mathematical Social Sciences, Elsevier, vol. 32(2), pages 95-108, October.
    3. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    4. 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(2), pages 123-133, June.
    5. James Cox & Vjollca Sadiraj & Ulrich Schmidt, 2015. "Paradoxes and mechanisms for choice under risk," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 215-250, June.
    6. 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 625-640, August.
    7. Eichberger, Jurgen & Kelsey, David, 1996. "Uncertainty Aversion and Preference for Randomisation," Journal of Economic Theory, Elsevier, vol. 71(1), pages 31-43, October.
    8. Schnedler, Wendelin & Dominiak, Adam, 2008. "Uncertainty aversion and preference for randomization," Papers 08-39, Sonderforschungsbreich 504.
    9. Eichberger, Jurgen & Grant, Simon & Kelsey, David, 2007. "Updating Choquet beliefs," Journal of Mathematical Economics, Elsevier, vol. 43(7-8), pages 888-899, September.
    10. Ghirardato, Paolo, 1997. "On Independence for Non-Additive Measures, with a Fubini Theorem," Journal of Economic Theory, Elsevier, vol. 73(2), pages 261-291, April.
    11. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, March.
    12. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    13. repec:dau:papers:123456789/7324 is not listed on IDEAS
    14. Nehring, Klaus, 1999. "Capacities and probabilistic beliefs: a precarious coexistence," Mathematical Social Sciences, Elsevier, vol. 38(2), pages 197-213, September.
    15. Sjaak Hurkens & Navin Kartik, 2009. "Would I lie to you? On social preferences and lying aversion," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 180-192, June.
    16. Sarin, Rakesh & Wakker, Peter P, 1998. "Dynamic Choice and NonExpected Utility," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 87-119, November.
    17. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Kelsey & Sara Roux, 2015. "An experimental study on the effect of ambiguity in a coordination game," Theory and Decision, Springer, vol. 79(4), pages 667-688, December.
    2. Sameh Habib & Daniel Friedman & Sean Crockett & Duncan James, 2017. "Payoff and presentation modulation of elicited risk preferences in MPLs," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 3(2), pages 183-194, December.
    3. Oechssler, Jörg & Roomets, Alex, 2014. "A Test of Mechanical Ambiguity," Working Papers 0555, University of Heidelberg, Department of Economics.
    4. Christoph Bühren & Fabian Meier & Marco Pleßner, 2023. "Ambiguity aversion: bibliometric analysis and literature review of the last 60 years," Management Review Quarterly, Springer, vol. 73(2), pages 495-525, June.
    5. Fabian Bopp & Sara le Roux, 2023. "Social learning under ambiguity - an experimental study," Working Papers Dissertations 110, Paderborn University, Faculty of Business Administration and Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dominiak, Adam & Duersch, Peter & Lefort, Jean-Philippe, 2012. "A dynamic Ellsberg urn experiment," Games and Economic Behavior, Elsevier, vol. 75(2), pages 625-638.
    2. Heyen, Daniel, 2018. "Ambiguity aversion under maximum-likelihood updating," LSE Research Online Documents on Economics 80342, London School of Economics and Political Science, LSE Library.
    3. Han Bleichrodt & Jurgen Eichberger & Simon Grant & David Kelsey & Chen Li, 2018. "A Test of Dynamic Consistency and Consequentialism in the Presence of Ambiguity," Discussion Papers 1803, University of Exeter, Department of Economics.
    4. Spyros Galanis, 2021. "Dynamic consistency, valuable information and subjective beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1467-1497, June.
    5. Georgalos, Konstantinos, 2021. "Dynamic decision making under ambiguity: An experimental investigation," Games and Economic Behavior, Elsevier, vol. 127(C), pages 28-46.
    6. Daniel Heyen, 2018. "Ambiguity aversion under maximum-likelihood updating," Theory and Decision, Springer, vol. 84(3), pages 373-386, May.
    7. Klaus Nehring, 2006. "Bernoulli Without Bayes: A Theory of Utility-Sophisticated Preferences under Ambiguity," Economics Working Papers 0072, Institute for Advanced Study, School of Social Science.
    8. Jürgen Eichberger & Simon Grant & David Kelsey, 2012. "When is ambiguity–attitude constant?," Journal of Risk and Uncertainty, Springer, vol. 45(3), pages 239-263, December.
    9. Calford, Evan M., 2020. "Uncertainty aversion in game theory: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 720-734.
    10. Dominiak, Adam & Schnedler, Wendelin, 2010. "Attitudes towards Uncertainty and Randomization: An Experimental Study," Working Papers 0494, University of Heidelberg, Department of Economics.
    11. Ellis, Andrew, 2018. "On dynamic consistency in ambiguous games," Games and Economic Behavior, Elsevier, vol. 111(C), pages 241-249.
    12. Oechssler, Jörg & Rau, Hannes & Roomets, Alex, 2016. "Hedging and Ambiguity," Working Papers 0621, University of Heidelberg, Department of Economics.
    13. Li, Chen & Turmunkh, Uyanga & Wakker, Peter P., 2020. "Social and strategic ambiguity versus betrayal aversion," Games and Economic Behavior, Elsevier, vol. 123(C), pages 272-287.
    14. Jürgen Eichberger & Simon Grant & David Kelsey, 2016. "Randomization and dynamic consistency," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 547-566, August.
    15. Gumen, Anna & Savochkin, Andrei, 2013. "Dynamically stable preferences," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1487-1508.
    16. Adam Dominiak & Wendelin Schnedler, 2011. "Attitudes toward uncertainty and randomization: an experimental study," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 289-312, October.
    17. Konstantinos Georgalos, 2019. "An experimental test of the predictive power of dynamic ambiguity models," Journal of Risk and Uncertainty, Springer, vol. 59(1), pages 51-83, August.
    18. repec:awi:wpaper:621 is not listed on IDEAS
    19. Zimper, Alexander, 2012. "Asset pricing in a Lucas fruit-tree economy with the best and worst in mind," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 610-628.
    20. Ludwig, Alexander & Zimper, Alexander, 2014. "Biased Bayesian learning with an application to the risk-free rate puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 79-97.
    21. Lapied, André & Toquebeuf, Pascal, 2012. "Dynamically consistent CEU preferences on f-convex events," Mathematical Social Sciences, Elsevier, vol. 63(3), pages 252-256.

    More about this item

    Keywords

    ambiguity aversion; uncertainty; minmax-expected utility;
    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:awi:wpaper:0528. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabi Rauscher (email available below). General contact details of provider: https://edirc.repec.org/data/awheide.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.