Three layers of uncertainty

Ilke Aydogan (), Loïc Berger, Valentina Bosetti and Ning Liu
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Ilke Aydogan: IÉSEG School Of Management [Puteaux]
Ning Liu: BUAA - Beihang University

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Abstract: We explore decision-making under uncertainty using a framework that decom- poses uncertainty into three distinct layers: (1) risk, which entails inherent random- ness within a given probability model; (2) model ambiguity, which entails uncertainty about the probability model to be used; and (3) model misspecification, which en- tails uncertainty about the presence of the correct probability model among the set of models considered. Using a new experimental design, we isolate and measure attitudes towards each layer separately. We conduct our experiment on three different subject pools and document the existence of a behavioral distinction between the three layers. In addition to providing new insights into the underlying processes behind ambiguity aversion, we provide the first empirical evidence of the role of model misspecification in decision-making under uncertainty.

Keywords: Ambiguity aversion; model uncertainty; model misspecification; non-expected utility; reduction of compound lotteries (search for similar items in EconPapers)
Date: 2022-11-15
New Economics Papers: this item is included in nep-hpe and nep-upt
Note: View the original document on HAL open archive server: https://hal.science/hal-03031751v2
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Three Layers of Uncertainty (2023)
Working Paper: Three Layers of Uncertainty (2023)
Working Paper: Three layers of uncertainty (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-03031751

DOI: 10.1093/jeea/jvad008

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