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Ellsberg Re-revisited: An Experiment Disentangling Model Uncertainty and Risk Aversion

Author

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  • Loic Berger

    (Fondazione Eni Enrico Mattei (FEEM))

  • Valentina Bosetti

    (Bocconi University and Fondazione Eni Enrico Mattei (FEEM))

Abstract

The results of an experiment extending Ellsberg's setup demonstrate that attitudes towards ambiguity and compound uncertainty are closely related. However, this association is much stronger when the second layer of uncertainty is subjective than when it is objective. Provided that the compound probabilities are simple enough, we find that most subjects, consisting of both students and policy makers, (1) reduce compound objective probabilities, (2) do not reduce compound subjective probabilities, and (3) are ambiguity non-neutral. By decomposing ambiguity into risk and model uncertainty, and jointly eliciting the attitudes individuals manifest towards these two types of uncertainty, we characterize individuals' degree of ambiguity aversion. Our data provides evidence of decreasing absolute ambiguity aversion and constant relative ambiguity aversion.

Suggested Citation

  • Loic Berger & Valentina Bosetti, 2016. "Ellsberg Re-revisited: An Experiment Disentangling Model Uncertainty and Risk Aversion," Working Papers 2016.37, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2016.37
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    References listed on IDEAS

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    3. Aggarwal, Divya & Damodaran, Uday, 2020. "Ambiguity attitudes and myopic loss aversion: Experimental evidence using carnival games," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    4. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.

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    More about this item

    Keywords

    Ambiguity Aversion; Model Uncertainty; Reduction of Compound Lotteries; Non-expected Utility; Subjective Probabilities; Decreasing Absolute Ambiguity Aversion;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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