Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills

Sasha Prokosheva

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: I investigate the relationship between attitudes towards ambiguity and ability to reduce compound risks. The evidence from an experiment on adolescents shows that patterns identified in the previous literature are susceptible to experimental design and subject sample characteristics. Overall for a 20% of my subject sample, I do not observe a significant relationship between ambiguity-neutral behavior and reduction of compound lotteries. The relationship also varies with subjects' cognitive skills and the way lotteries are presented. My results caution about theoretical studies which model ambiguity preferences by relaxing the assumption of compound risk reduction, and add to the evidence against the use of compound lotteries to represent ambiguity in experiments.

Keywords: ambiguity; cognitive ability; reduction of compound lotteries (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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