Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence

Chun-Lei Yang and Lan Yao

MPRA Paper from University Library of Munich, Germany

Abstract: We study the two-color problem by Ellsberg (1961) with the modification that the decision maker draws twice with replacement and a different color wins in each draw. The 50-50 risky urn turns out to have the highest risk conceivable among all prospects including the ambiguous one, while all feasible color distributions are mean-preserving spreads to one another. We show that the well-known second-order sophisticated theories like MEU, CEU, and REU as well as Savage’s first-order theory of SEU share the same predictions in our design, for any first-order risk attitude. Yet, we observe that substantial numbers of subjects violate the theory predictions even in this simple design.

Keywords: Ellsberg paradox; Ambiguity; Second-order risk; Second-order preference theory; Experiment (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2011-01-22
New Economics Papers: this item is included in nep-exp, nep-hpe, nep-neu and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:28531

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