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A Bayesian approach to the Machina paradox

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  • Mateus Joffily

    (CNRS, Université Lumière Lyon 2, Université Jean Monnet Saint-Etienne, emlyon business school, GATE, 69007 Lyon, France)

  • Thijs van de Laar

    (Department of Electrical Engineering, Eindhoven University of Technology, Eindhoven, The Netherlands)

Abstract

Variants of the Ellsberg urn experiments introduced by Machina (Am. Econ. Rev., 99(1), 385-392, 2009) have challenged several prominent models of ambiguity aversion. We show that our Bayesian hierarchical model - originally developed to explain Ellsberg-type preferences - also captures the ambiguity preferences observed in Machina's reflection example. Our findings indicate that ambiguity aversion in both the Ellsberg and Machina paradoxes can be attributed to pessimistic prior beliefs about unobserved outcomes. Moreover, the model predicts an asymmetric pattern of preferences across intermediate payoff levels in the reflection example: ambiguity aversion is stronger when the intermediate payoff lies closer to the worst outcome, while the opposite holds for ambiguity-seeking preferences.

Suggested Citation

  • Mateus Joffily & Thijs van de Laar, 2025. "A Bayesian approach to the Machina paradox," Working Papers 2525, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    • Handle: RePEc:gat:wpaper:2525
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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