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Ellsberg re-revisited: An experiment disentangling model uncertainty and risk aversion

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  • Loic Berger
  • Valentina Bosetti

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. Keywords: Ambiguity aversion, model uncertainty, reduction of compound lotteries, nonexpected utility, subjective probabilities, decreasing absolute ambiguity aversion JEL Classification: D81

Suggested Citation

  • Loic Berger & Valentina Bosetti, 2016. "Ellsberg re-revisited: An experiment disentangling model uncertainty and risk aversion," Working Papers 576, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:576
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    1. repec:eee:ecolet:v:174:y:2019:i:c:p:123-127 is not listed on IDEAS
    2. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    3. Barnsley, P. & Cubi-Molla, P. & Fischer, A. & Towse, A., 2016. "Uncertainty and Risk in HTA Decision Making," Research Papers 001764, Office of Health Economics.

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    JEL classification:

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

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