UNRAVELING AMBIGUITY AVERSION

Ilke Aydogan (i.aydogan@ieseg.fr), Loïc Berger and Valentina Bosetti
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Ilke Aydogan: IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France; and iRisk Research Center on Risk and Uncertainty

Working Papers from IESEG School of Management

Abstract: We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty (risk, compound risk, model ambiguity, and Ellsberg ambiguity), which entail different degrees of complexity, from subjects with different sophistication levels. We show that (1) ambiguity aversion is robust to sophistication, but the strong relationship that has been previously reported between attitudes toward ambiguity and compound risk is not. (2) Ellsberg ambiguity attitude can be partly explained by attitudes toward complexity for less sophisticated subjects, but not for more sophisticated ones. Overall, and regardless of the subject’s sophistication level, the main driver of Ellsberg ambiguity attitude is a specific treatment of unknown probabilities. These results leave room for using ambiguity models in applications with prescriptive purposes.

Keywords: : Ambiguity aversion; reduction of compound risk; model uncertainty; complexity (search for similar items in EconPapers)
JEL-codes: C91 C93 D81 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2023-01
New Economics Papers: this item is included in nep-exp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Unraveling Ambiguity Aversion (2023)
Working Paper: Unraveling Ambiguity Aversion (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ies:wpaper:e202301

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