Unraveling Ambiguity Aversion

We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty, entailing different degrees of complexity, from subjects with different sophistication levels. We sho...

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Bibliographic Details
Published inThe review of economics and statistics pp. 1 - 32
Main Authors Aydogan, Ilke, Berger, Loïc, Bosetti, Valentina
Format Journal Article
LanguageEnglish
Published Massachusetts Institute of Technology Press (MIT Press) 24.07.2023
Subjects
Quantitative Finance
Ambiguity aversion
complexity
model uncertainty
reduction of compound risk
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ISSN0034-6535
1530-9142
DOI10.1162/rest_a_01358

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Summary:We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty, entailing different degrees of complexity, from subjects with different sophistication levels. We show that (1) ambiguity aversion is robust to sophistication, but the strong relationship previously reported between attitudes toward ambiguity and compound risk is not. (2) Ellsberg ambiguity attitude can be partly explained by attitudes toward complexity for less sophisticated subjects only. Overall, regardless of the subject's sophistication level, the main driver of Ellsberg ambiguity attitude is a specific treatment of unknown probabilities.
ISSN:0034-6535
1530-9142
DOI:10.1162/rest_a_01358