A Bayesian approach to the Machina paradox

Mateus Joffily () and Thijs van de Laar ()
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Mateus Joffily: CNRS, Université Lumière Lyon 2, Université Jean Monnet Saint-Etienne, emlyon business school, GATE, 69007 Lyon, France
Thijs van de Laar: Department of Electrical Engineering, Eindhoven University of Technology, Eindhoven, The Netherlands

No 2525, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: Variants of the Ellsberg urn experiments introduced by Machina (Am. Econ. Rev., 99(1), 385-392, 2009) have challenged several prominent models of ambiguity aversion. We show that our Bayesian hierarchical model - originally developed to explain Ellsberg-type preferences - also captures the ambiguity preferences observed in Machina's reflection example. Our findings indicate that ambiguity aversion in both the Ellsberg and Machina paradoxes can be attributed to pessimistic prior beliefs about unobserved outcomes. Moreover, the model predicts an asymmetric pattern of preferences across intermediate payoff levels in the reflection example: ambiguity aversion is stronger when the intermediate payoff lies closer to the worst outcome, while the opposite holds for ambiguity-seeking preferences.

Keywords: Machina Paradox; Ambiguity Aversion; Bayesian Modeling (search for similar items in EconPapers)
JEL-codes: C63 D81 D91 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-evo, nep-exp, nep-mic and nep-upt
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