IDEAS home Printed from https://ideas.repec.org/p/igi/igierp/653.html
   My bibliography  Save this paper

Economic Rationality: Investigating the Links between Uncertainty, Complexity, and Sophistication

Author

Listed:
  • Ilke Aydogan
  • Loic Berger
  • Valentina Bosetti

Abstract

We report on a laboratory experiment measuring the preferences of a unique pool of risk professionals over various sources of uncertainty that entail different degrees of complexity. We then compare these preferences with those of a control group composed of social science students to obtain a deeper understanding of the mechanisms driving behaviors under risk and ambiguity. We find that (1) ambiguity aversion is robust to subjects’ degree of sophistication in probabilistic reasoning and background. (2) An association exists between attitudes toward ambiguity and compound risk for students/less sophisticated subjects, and is mainly explained by their attitudes toward complexity. Such an association does not exist for risk professionals/more sophisticated subjects. (3) The failure to reduce compound risk emerges as a sufficent, but not necessary, condition for ambiguity non-neutrality. These findings suggest that decision making under ambiguity cannot be reduced to decision making under risk. Keywords: Ambiguity aversion, reduction of compound lotteries, non-expected utility, model uncertainty, model misspecification JEL Codes: D81

Suggested Citation

  • Ilke Aydogan & Loic Berger & Valentina Bosetti, 2019. "Economic Rationality: Investigating the Links between Uncertainty, Complexity, and Sophistication," Working Papers 653, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:653
    as

    Download full text from publisher

    File URL: https://repec.unibocconi.it/igier/igi/wp/2019/653.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ilke AYDOGAN & Loïc BERGER & Valentina BOSETTI & Ning LIU, 2022. "Three layers of uncertainty," Working Papers 2022-iRisk-01, IESEG School of Management.
    2. Dietz, Simon & Niehörster, Falk, 2020. "Pricing ambiguity in catastrophe risk insurance," LSE Research Online Documents on Economics 106116, London School of Economics and Political Science, LSE Library.
    3. Ilke Aydogan & Loïc Berger & Valentina Bosetti & Ning Liu, 2022. "Three layers of uncertainty," Working Papers hal-03031751, HAL.
    4. repec:hal:journl:hal-03031751 is not listed on IDEAS
    5. Kellner, Christian & Le Quement, Mark T. & Riener, Gerhard, 2022. "Reacting to ambiguous messages: An experimental analysis," Games and Economic Behavior, Elsevier, vol. 136(C), pages 360-378.
    6. Calford, Evan M., 2020. "Uncertainty aversion in game theory: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 720-734.
    7. Simon Dietz & Falk Niehörster, 2021. "Pricing ambiguity in catastrophe risk insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(2), pages 112-132, September.

    More about this item

    Keywords

    ambiguity aversion; reduction of compound lotteries; non-expected utility; model uncertainty; model misspecification jel codes: d81;
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:igi:igierp:653. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: http://www.igier.unibocconi.it/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.