Bayesian Decisions with Ambiguous Belief Aversion

W Viscusi and Wesley A Magat

Journal of Risk and Uncertainty, 1992, vol. 5, issue 4, 87 pages

Abstract: This study provides an empirical perspective on the effect of ambiguous environmental risk information on lottery preferences using a sample of 646 adults. The learning process follows a Bayesian expected utility model in terms of the overall magnitude and sign of the weights that respondents place on the risk information. Significant ambiguous belief aversion that is consistent with the Ellsberg paradox is also evident. The extent of this aversion increases with the size of the risk spread, but at a decreasing rate. These results are consistent with both probability-based and preference-based models of ambiguous probabilities. The findings also indicate the presence of cognitive limitations in the processing of risk information, but lead to rejection of more extreme models in which individuals respond in alarmist fashion or do not learn at all. Copyright 1992 by Kluwer Academic Publishers

Date: 1992
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