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Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence

  • Yang, Chun-Lei
  • Yao, Lan
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    We study the two-color problem by Ellsberg (1961) with the modification that the decision maker draws twice with replacement and a different color wins in each draw. The 50-50 risky urn turns out to have the highest risk conceivable among all prospects including the ambiguous one, while all feasible color distributions are mean-preserving spreads to one another. We show that the well-known second-order sophisticated theories like MEU, CEU, and REU as well as Savage’s first-order theory of SEU share the same predictions in our design, for any first-order risk attitude. Yet, we observe that substantial numbers of subjects violate the theory predictions even in this simple design.

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    File URL: http://mpra.ub.uni-muenchen.de/28531/1/MPRA_paper_28531.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28531.

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    Date of creation: 22 Jan 2011
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    Handle: RePEc:pra:mprapa:28531
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    1. Ramon Casadesus-Masanell & Peter Klibanoff & Emre Ozdenoren, 1998. "Maximum Expected Utility over Savage Acts with a Set of Priors," Discussion Papers 1218, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Casadesus-Masanell, Ramon & Klibanoff, Peter & Ozdenoren, Emre, 2000. "Maxmin Expected Utility over Savage Acts with a Set of Priors," Journal of Economic Theory, Elsevier, vol. 92(1), pages 35-65, May.
    3. Yoram Halevy & Vincent Feltkamp, . "A Bayesian Approach to Uncentainty Aversion," CARESS Working Papres 99-03, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    4. Robert F. Nau, 2006. "Uncertainty Aversion with Second-Order Utilities and Probabilities," Management Science, INFORMS, vol. 52(1), pages 136-145, January.
    5. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
    6. Segal, Uzi, 1987. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 175-202, February.
    7. Halevy, Yoram, 2005. "Ellsberg Revisited: an Experimental Study," Microeconomics.ca working papers halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
    8. Kyoungwon Seo, 2009. "Ambiguity and Second-Order Belief," Econometrica, Econometric Society, vol. 77(5), pages 1575-1605, 09.
    9. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
    10. Uzi Segal, 2000. "Two Stage Lotteries Without the Reduction Axiom," Levine's Working Paper Archive 7599, David K. Levine.
    11. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
    12. Jack Stecher & Timothy Shields & John Dickhaut (deceased), 2011. "Generating Ambiguity in the Laboratory," Management Science, INFORMS, vol. 57(4), pages 705-712, April.
    13. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
    14. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    15. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
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