An experiment on outcome uncertainty

Pedro Albarrán, Judit Alonso, Carmen Herrero, Giovanni Ponti (), Marcello Sartarelli and Diletta Topazio
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Pedro Albarrán: Universidad de Alicante
Judit Alonso: Universidad Internacional de la Rioja
Carmen Herrero: Universidad de Alicante
Giovanni Ponti: Universidad de Alicante
Marcello Sartarelli: Universidad Complutense de Madrid
Diletta Topazio: LUISS Guido Carli Roma

Journal of Risk and Uncertainty, 2025, vol. 70, issue 2, No 4, 147-170

Abstract: Abstract We report the evidence of a multi-stage lab experiment on individual decision making under ambiguity, where the latter is characterized by the (partial or) absence of information on some monetary values in the support of the lottery distributions. This complements the standard treatment of uncertainty where decision makers know the monetary prizes, but probabilities are uncertain. We use both a structural and a non-structural approach when analyzing subjects’ behavior under risk, compound risk, and outcome ambiguity. Our main finding is that subjects are risk-averse and ambiguity lovers in that they evaluate more optimistically uncertain payoffs under ambiguity compared to compound risk. We also study how subjects evaluate scenarios with uncertain outcomes: 60% of choices are consistent with the Expected Utility paradigm, while 40% of them are better described by a heuristic we label as “naïve,” in which the order of integration of Expected Utility is reversed (that is, they first form a point estimate of the uncertain payoffs, and then they evaluate the lotteries’ expected utility). Finally, we also find that risk and ambiguity aversion are positively correlated.

Keywords: Experimental economics; Individual decision making; Risk; Compound risk and ambiguity; Uncertain outcomes (search for similar items in EconPapers)
JEL-codes: D81 D90 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11166-024-09448-0

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