Experimental Evidence on the Relationship Between Perceived Ambiguity and Likelihood Insensitivity

Luca Henkel

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Observed individual behavior in the presence of ambiguity shows insufficient responsiveness to changes in subjective likelihoods. Despite being integral to theoretical models and relevant in many domains, evidence on the causes and determining factors of such likelihood insensitive behavior is scarce. This paper investigates the role of beliefs in the form of ambiguity perception – the extent to which a decision-maker has difficulties assigning a single probability to each possible event – as a potential determinant. Using an experiment, I elicit measures of ambiguity perception and likelihood insensitivity and exogenously vary the level of perceived ambiguity. The results provide strong support for a perception-based explanation of likelihood insensitivity. The two measures are highly correlated at the individual level, and exogenously increasing ambiguity perception increases insensitivity, suggesting a causal relationship. In contrast, ambiguity perception is unrelated to ambiguity aversion – the extent to which a decision-maker dislikes the presence of ambiguity.

Keywords: Ambiguity; decision-making under uncertainty; likelihood insensitivity; multiple prior models (search for similar items in EconPapers)
JEL-codes: C91 D81 D83 D91 (search for similar items in EconPapers)
Pages: 42
Date: 2023-07
New Economics Papers: this item is included in nep-cbe, nep-dcm, nep-exp and nep-upt
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Related works:
Journal Article: Experimental evidence on the relationship between perceived ambiguity and likelihood insensitivity (2024)
Working Paper: Experimental Evidence on the Relationship between Perceived Ambiguity and Likelihood Insensitivity (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2023_440

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