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The Strength of Sensitivity to Ambiguity

Author

Listed:
  • Robin Cubitt

    (University of Nottingham)

  • Gijs van de Kuilen

    (Tilburg University)

  • Sujoy Mukerji

    (Queen Mary University of London)

Abstract

We report an experiment where each subject's ambiguity sensitivity is measured by an ambiguity premium, a concept analogous to and comparable with a risk premium. In our design, some tasks feature known objective risks and others uncertainty about which subjects have imperfect, heterogeneous, information (''ambiguous tasks''). We show how the smooth ambiguity model can be used to calculate ambiguity premia. A distinctive feature of our approach is estimation of each subject's subjective beliefs about the uncertainty in ambiguous tasks. We find considerable heterogeneity among subjects in beliefs and ambiguity premia; and that, on average, ambiguity sensitivity is about as strong as risk sensitivity.

Suggested Citation

  • Robin Cubitt & Gijs van de Kuilen & Sujoy Mukerji, 2017. "The Strength of Sensitivity to Ambiguity," Working Papers 836, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:836
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    Cited by:

    1. Aurélien Baillon & Yoram Halevy & Chen Li, 2022. "Experimental elicitation of ambiguity attitude using the random incentive system," Experimental Economics, Springer;Economic Science Association, vol. 25(3), pages 1002-1023, June.
    2. Filiz-Ozbay, Emel & Gulen, Huseyin & Masatlioglu, Yusufcan & Ozbay, Erkut Y., 2022. "Comparing ambiguous urns with different sizes," Journal of Economic Theory, Elsevier, vol. 199(C).
    3. d’Albis, Hippolyte & Attanasi, Giuseppe & Thibault, Emmanuel, 2020. "An experimental test of the under-annuitization puzzle with smooth ambiguity and charitable giving," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 694-717.
    4. Francesco Cavazza & Francesco Galioto & Meri Raggi & Davide Viaggi, 2020. "Digital Irrigated Agriculture: Towards a Framework for Comprehensive Analysis of Decision Processes under Uncertainty," Future Internet, MDPI, vol. 12(11), pages 1-16, October.
    5. Oechssler, Jörg & Rau, Hannes & Roomets, Alex, 2019. "Hedging, ambiguity, and the reversal of order axiom," Games and Economic Behavior, Elsevier, vol. 117(C), pages 380-387.
    6. Mohammed Abdellaoui & Horst Zank, 2023. "Source and rank-dependent utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(4), pages 949-981, May.
    7. Chen, Hsiao-Chi & Liu, Shi-Miin, 2024. "Optimal investments of port authorities facing ambiguity on uncertain market demands," Transportation Research Part B: Methodological, Elsevier, vol. 179(C).
    8. Makarov, Dmitry, 2021. "Optimal portfolio under ambiguous ambiguity," Finance Research Letters, Elsevier, vol. 43(C).
    9. Serban Raicu & Mihaela Popa & Dorinela Costescu, 2022. "Uncertainties Influencing Transportation System Performances," Sustainability, MDPI, vol. 14(13), pages 1-15, June.
    10. Milos Borozan & Loreta Cannito & Barbara Luppi, 2022. "A tale of two ambiguities: A conceptual overview of findings from economics and psychology," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 6(S1), pages 11-21, July.
    11. Kanin Anantanasuwong & Roy Kouwenberg & Olivia S. Mitchell & Kim Peijnenburg, 2024. "Ambiguity attitudes for real-world sources: field evidence from a large sample of investors," Experimental Economics, Springer;Economic Science Association, vol. 27(3), pages 548-581, July.
    12. Watanabe, Masahide & Fujimi, Toshio, 2022. "Ambiguity of scientific probability predictions and willingness-to-pay for climate change mitigation policies," Research in Economics, Elsevier, vol. 76(4), pages 386-402.
    13. Donald A. Redelmeier & Allan S. Detsky, 2021. "Economic Theory and Medical Assistance in Dying," Applied Health Economics and Health Policy, Springer, vol. 19(1), pages 5-8, January.
    14. Wu, Haixia & Li, Jianping & Ge, Yan, 2022. "Ambiguity preference, social learning and adoption of soil testing and formula fertilization technology," Technological Forecasting and Social Change, Elsevier, vol. 184(C).
    15. Ilke Aydogan & Loïc Berger & Vincent Théroude, 2023. "More Ambiguous or More Complex? An Investigation of Individual Preferences under Uncertainty," Working Papers of BETA 2023-10, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    16. 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.
    17. Ilke AYDOGAN & Loïc BERGER & Vincent THEROUDE, 2023. "More Ambiguous or More Complex? An Investigation of Individual Preferences under Model Uncertainty," Working Papers 2023-iRisk-02, IESEG School of Management.
    18. Li, Wenhui & Wilde, Christian, 2021. "Separating the effects of beliefs and attitudes on pricing under ambiguity," SAFE Working Paper Series 311, Leibniz Institute for Financial Research SAFE.

    More about this item

    Keywords

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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