The uncertainty triangle – Uncovering heterogeneity in attitudes towards uncertainty

Daniel Burghart, Thomas Epper and Ernst Fehr

Journal of Risk and Uncertainty, 2020, vol. 60, issue 2, No 2, 125-156

Abstract: Abstract This paper develops a graphical tool – the uncertainty triangle – that allows for testing whether choices under uncertainty obey the generalized axiom of revealed preference (GARP). We find that more than 95% of subjects made choices that can be rationalized by the maximization of a well-behaved utility function. The uncertainty triangle also makes it straightforward to characterize heterogeneity in attitudes towards uncertainty. To accomplish this we propose a one-parameter extension of Expected Utility in which uncertainty attitude is everywhere constant in the triangle. Experimental data indicate that about 60% of participants made choices consistent with the model and, within this group, 48% were uncertainty averse, 22% uncertainty seeking, and 30% uncertainty neutral. The remaining 40% of participants appear to hold variable uncertainty attitudes. A model that can accommodate this variability is proposed and calibrated.

Keywords: Uncertainty; Risk; Expected utility; Revealed preferences; Decision-making; D81; C91 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11166-020-09331-8

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