Ellsberg paradox: Ambiguity and complexity aversions compared

Jaromír Kovářík, Dan Levin () and Tao Wang
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Tao Wang: Swarthmore College

Journal of Risk and Uncertainty, 2016, vol. 52, issue 1, No 3, 47-64

Abstract: Abstract We present a simple model where preferences with complexity aversion, rather than ambiguity aversion, resolve the Ellsberg paradox. We test our theory using laboratory experiments where subjects choose among lotteries that “range” from a simple risky lottery, through risky but more complex lotteries, to one similar to Ellsberg’s ambiguity urn. Our model ranks lotteries according to their complexity and makes different—at times contrasting—predictions than most models of ambiguity in response to manipulations of prizes. The results support that complexity aversion preferences play an important and separate role from beliefs with ambiguity aversion in explaining behavior under uncertainty.

Keywords: Ambiguity; Complexity; Compound risk; Ellsberg paradox; Risk; Uncertainty (search for similar items in EconPapers)
JEL-codes: C91 D01 D81 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (15)

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DOI: 10.1007/s11166-016-9232-0

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