Comparative Ignorance as an Explanation of Ambiguity Aversion and Ellsberg Choices: A Survey with a New Proposal for Bayesian Training

Phoebe Koundouri (), Nikitas Pittis () and Panagiotis Samartzis
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Nikitas Pittis: University of Piraeus, Greece

No 2408, DEOS Working Papers from Athens University of Economics and Business

Abstract: Ellsberg-type choices (Ellsberg's paradox) are evidence against the Bayesian theory of Subjective Expected Utility Maximization (SEUM). These choices reflect a particular attitude of the decision maker (DM), namely Ambiguity Aversion (AA). There are two competing interpretations of AA. The first recognizes AA as rational behavior, while the second views AA as a manifestation of a psychological fallacy. This paper focuses on the second interpretation of AA and specifically discusses the most important psychological explanation of AA that has been proposed in the literature, namely Fox and Tversky's (1995) Comparative Ignorance Hypothesis (CIH). CIH holds that AA is mainly a "comparative effect" that occurs when DM feels that he is epistemically inferior for some events of interest compared to others (for which she believes to be epistemically superior). As a result, DM exhibits an aversion towards betting on the epistemically inferior events. The purpose of the paper is twofold: First, to provide a survey of the literature on CIH. Second, to propose a novel "Bayesian Training" (BT) procedure based on "counterfactual thinking". A decision maker who finds BT attractive is likely to move out of the state of comparative ignorance, thereby ceasing to exhibit AA and joining the Bayesian camp.

Keywords: counterfactual priors; ambiguity; ellsberg paradox (search for similar items in EconPapers)
JEL-codes: C44 D81 D83 D89 (search for similar items in EconPapers)
Date: 2024-03-11
New Economics Papers: this item is included in nep-upt
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