Risk, Ambiguity - Gains, Losses

Sujoy Chakravarty and Jaideep Roy

No WP2006-02-06, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: We use a multiple price list (MPL) method to elicit attitudes to risky and ambiguous prospects. In particular we wish to investigate if there are differences in agent behaviour under uncertainty over gain amounts vis a vis uncertainty over loss amounts. On an aggregate level, we find that (i) in the domain of risk, subjects are risk averse over both gain and loss lotteries with the degree of risk aversion being lower for losses than gains, (ii) subjects are ambiguity averse over ambiguous prospects that involve gains, but that they are mildly ambiguity seeking over such prospects that involve loss and (iii) attitudes toward risk and ambiguity are positively correlated in the domain of gains and are independent of each other in the domain of losses. These behavioural observations are statically significant using both parametric as well as non-parametric tests. Further analysis shows that at an individual level, (a) in the domain of risk, there is a high incidence of a reflection effect across gains and losses though the subjects’ behaviour is bimodal, that is, many are risk averse in gains and risk seeking in losses while many others are risk seeking in gains and risk averse in losses, while (b) in the domain of ambiguity, there is also a high incidence of a reflection effect although almost all such cases exhibit ambiguity aversion in gains and ambiguity seeking in losses.

Date: 2006-02-06
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