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Signaling Probabilities in Ambiguity: on the impact of vague news

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  • Dmitri Vinogradov
  • Yousef Makhlouf

Abstract

Vague, or imprecise, news may affect decisions by changing either the funda- mentals, or the associated uncertainty, or both. We show response to vague news is shaped by ambiguity attitudes, yet with qualitative differences for dif- ferent levels of risk, on top of ambiguity, conveyed. The decision functional con- sists of a probabilistic term and an ambiguity premium; the latter depends on both risk and ambiguity, implying differential responses of ambiguity-neutral, -averse and -seeking subjects to probabilistic, as well as non-probabilistic news. In a two-color Ellsberg experiment with signals we obtain ambiguity attitudes matter more for non-probabilistic and less for probabilistic, though still impre- cise news. For vague news conveying a relatively high probability of success, subjects exhibit insensitivity to the ambiguity component, unless explicitly facing similar news of di§erent degrees of precision. Possible explanation is in either flat ambiguity premiums, or the cognitive inability to process the risky and the ambiguous components simultaneously.

Suggested Citation

  • Dmitri Vinogradov & Yousef Makhlouf, 2017. "Signaling Probabilities in Ambiguity: on the impact of vague news," Working Papers 2017_12, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2017_12
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    More about this item

    Keywords

    ambiguity-aversion; ambiguity premium; Ellsberg experi- ment; vague news.;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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