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Ambiguity Framed

Mark Schneider (), Jonathan Leland and Nathaniel Wilcox ()
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Mark Schneider: Economic Science Institute, Chapman University
Jonathan Leland: National Science Foundation

Working Papers from Chapman University, Economic Science Institute

Abstract: In his exposition of subjective expected utility theory, Savage (1954) proposed that the Allais paradox could be reduced if it were recast into a format which made the appeal of the independence axiom of expected utility theory more transparent. Recent studies consistently find support for this prediction. We consider a salience-based choice model which explains this frame-dependence of the Allais paradox and derive the novel prediction that the same type of presentation format which was found to reduce Allais-style violations of expected utility theory will also reduce Ellsberg-style violations of subjective expected utility theory since that format makes the appeal of Savage’s “sure thing principle” more transparent. We design an experiment to test this prediction and find strong support for such frame dependence of ambiguity aversion in Ellsberg-style choices. In particular, we observe markedly less ambiguity-averse behavior in Savage’s matrix format than in a more standard ‘prospect’ format. This finding poses a new challenge for the leading models of ambiguity aversion.

Keywords: Ellsberg paradox; Ambiguity Aversion; Framing Effects; Expected Utility (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp, nep-net and nep-upt
Date: 2016
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Persistent link: http://EconPapers.repec.org/RePEc:chu:wpaper:16-11

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