Unraveling Ambiguity Aversion

Ilke Aydogan (), Loïc Berger and Valentina Bosetti
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Ilke Aydogan: IÉSEG School Of Management [Puteaux]

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Abstract: We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty (risk, compound risk, model ambiguity, and Ellsberg ambiguity), which entail different degrees of complexity, from subjects with different sophistication levels. We show that (1) ambiguity aversion is robust to sophistication, but the strong relationship that has been previously reported between attitudes toward ambiguity and compound risk is not. (2) Ellsberg ambiguity attitude can be partly explained by attitudes toward complexity for less sophisticated subjects, but not for more sophisticated ones. Overall, and regardless of the subject's sophistication level, the main driver of Ellsberg ambiguity attitude is a specific treatment of unknown probabilities. These results leave room for using ambiguity models in applications with prescriptive purposes.

Keywords: Ambiguity aversion; complexity; reduction of compound risk; model uncertainty (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-exp, nep-rmg and nep-upt
Note: View the original document on HAL open archive server: https://hal.science/hal-04071242
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Citations: View citations in EconPapers (2)

Published in Review of Economics and Statistics, 2023, pp.1-32. ⟨10.1162/rest_a_01358⟩

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Related works:
Working Paper: Unraveling Ambiguity Aversion (2023)
Working Paper: UNRAVELING AMBIGUITY AVERSION (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04071242

DOI: 10.1162/rest_a_01358

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