The uncertainty triangle – Uncovering heterogeneity in attitudes towards uncertainty

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.