Is Ambiguity Aversion a Preference?

Chen, Daniel L. and Schonger, Martin (2016) Is Ambiguity Aversion a Preference? TSE Working Paper, n. 16-703, Toulouse

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Ambiguity aversion has been used to explain a wide range of phenomena in law and policy: incomplete contracts, stock market volatility, abstention from voting, and why prosecutors offer and defendants accept harsh plea bargains. This paper presents evidence problematizing the experimental basis for ambiguity aversion. Ambiguity aversion is the interpretation of the experimental finding (Ellsberg paradox) that most subjects violate probabilistic sophistication: They prefer betting on events whose probabilities are known (objective) to betting on events whose probabilities are unknown to them (subjective). However in typical experiments these unknown probabilities are known and often determined by the experimenter. Thus the typical Ellsberg experiment is a situation of asymmetric information. People may try to avoid situations where they are the less informed party in an asymmetric situation setting. Indeed doing so is often normatively appropriate. Thus avoidance of situations of informational asymmetry is a potential confound in typical Ellsberg experiments. Paying to avoid information asymmetry in an Ellsberg experiment would constitute the misapplication of a heuristic to the unfamiliar experimental situation. To eliminate this confound, this paper proposes a new source of ambiguity: participant generated ambiguity. Instead of the experimenter filling an Ellsberg urn, the opaque Ellsberg urn is filled by the other subjects in a laboratory session. We find that eliminating asymmetric information while leaving ambiguity in place, makes subjects more than willing to choose the ambiguous bet rather than the objective one. This is despite the fact that choosing the objective bet is costless. These results have fundamental implications for individual decision making and for the empirical predictions of theoretical models incorporating Knightian uncertainty.

Item Type: Monograph (Working Paper)
Language: English
Date: September 2016
Place of Publication: Toulouse
Uncontrolled Keywords: uncertainty aversion, probabilistic sophistication, sources of ambiguity, Ellsberg paradox
JEL Classification: C91 - Laboratory, Individual Behavior
D81 - Criteria for Decision-Making under Risk and Uncertainty
G11 - Portfolio Choice; Investment Decisions
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 03 Oct 2016 10:34
Last Modified: 02 Oct 2019 23:03
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