Testing axiomatizations of ambiguity aversion

Daniel Chen and Martin Schonger

No 16-61, IAST Working Papers from Institute for Advanced Study in Toulouse (IAST)

Abstract: The study of the normative and positive theory of choice under uncertainty has made major advances through thought experiments often referred to as paradoxes: the St. Petersburg paradox, the Allais paradox, the Ellsberg paradox, and the Rabin paradox. Machina proposes a new thought experiment which posits a choice between two acts that have three outcomes. As in the Ellsberg paradox there are three events, but while the Ellsberg paradox has two (monetary) outcomes in Machina there are three. Machina shows that four prominent theories of ambiguity aversion predict indifference between the acts. Introspection, however, suggests that many people might very well strictly prefer one act over the other. This paper makes four contributions: first, to our knowledge, it is the first to experimentally implement the Machina thought experiment. Second, we employ a novel method to simultaneously elicit the certainty equivalent of an embedded lottery. Third, our results—across three experiments—indicate non-indifference, which rejects earlier theories of ambiguity aversion, but is consistent with a newer one, which we apply to explain our results. Fourth, we show that independence is a sufficient condition for indifference in the Machina paradox, and thereby explains why so many models predict indifference.

Keywords: Ellsberg paradox; Machina paradox; uncertainty aversion; independence axiom (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-exp, nep-hpe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://iast.fr/pub/31142
http://nber.org/~dlchen/papers/Testing_Axiomatizations_of_Ambiguity_Aversion.pdf Full text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://nber.org/~dlchen/papers/Testing_Axiomatizations_of_Ambiguity_Aversion.pdf [301 Moved Permanently]--> https://www.nber.org/~dlchen/papers/Testing_Axiomatizations_of_Ambiguity_Aversion.pdf [301 Moved Permanently]--> https://users.nber.org/~dlchen/papers/Testing_Axiomatizations_of_Ambiguity_Aversion.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tse:iastwp:31142

Access Statistics for this paper

More papers in IAST Working Papers from Institute for Advanced Study in Toulouse (IAST) Contact information at EDIRC.
Bibliographic data for series maintained by (com@tse-fr.eu).