A Two-Ball Ellsberg Paradox

Brian Jabarian and Simon Lazarus

No 10745, CESifo Working Paper Series from CESifo

Abstract: In an incentivized experiment on a representative sample from the US with 708 participants, we find that 55% of the subjects prefer avoiding ambiguity even when it means choosing dominated risky options. This aversion towards mere exposure to ambiguity violates the monotonicity axiom of almost all current ambiguity models. In a series of treatments, we establish that misunderstanding or suspicious beliefs are not the primary drivers of the aversion, but an aversion towards complexity that is generated by the presence of ambiguity. Such a complexity aversion explains about 43% of the variations in the two-ball Ellsberg and about 38% of the variations in the original Ellsberg paradox. We further explore the possible different cognitive mechanisms underlying the perception of ambiguity as complex. We find that participants who display the Two-Ball Ellsberg paradox are more likely to display cognitive uncertainty, thinking and choosing fast, and interacting less with the elements of the choice setting before making a choice.

Date: 2023
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
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