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Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills

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  • Sasha Prokosheva

Abstract

I investigate the relationship between attitudes towards ambiguity and ability to reduce compound risks. The evidence from an experiment on adolescents shows that patterns identified in the previous literature are susceptible to experimental design and subject sample characteristics. Overall for a 20% of my subject sample, I do not observe a significant relationship between ambiguity-neutral behavior and reduction of compound lotteries. The relationship also varies with subjects' cognitive skills and the way lotteries are presented. My results caution about theoretical studies which model ambiguity preferences by relaxing the assumption of compound risk reduction, and add to the evidence against the use of compound lotteries to represent ambiguity in experiments.

Suggested Citation

  • Sasha Prokosheva, 2014. "Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills," CERGE-EI Working Papers wp525, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp525
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    Cited by:

    1. Brañas-Garza, Pablo & Smith, John, 2016. "Cognitive abilities and economic behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 1-4.

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    More about this item

    Keywords

    ambiguity; cognitive ability; reduction of compound lotteries;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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