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Eliciting ambiguity aversion in unknown and in compound lotteries: a smooth ambiguity model experimental study

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  • Giuseppe Attanasi
  • Christian Gollier
  • Aldo Montesano
  • Noemi Pace

Abstract

Coherent-ambiguity aversion is defined within the (Klibanoff et al., Econometrica 73:1849–1892, 2005 ) smooth-ambiguity model (henceforth KMM) as the combination of choice-ambiguity and value-ambiguity aversion. Five ambiguous decision tasks are analyzed theoretically, where an individual faces two-stage lotteries with binomial, uniform, or unknown second-order probabilities. Theoretical predictions are then tested through a 10-task experiment. In (unambiguous) tasks 1–5, risk aversion is elicited through both a portfolio choice method and a BDM mechanism. In (ambiguous) tasks 6–10, choice-ambiguity aversion is elicited through the portfolio choice method, while value-ambiguity aversion comes about through the BDM mechanism. The behavior of over 75 % of classified subjects is in line with the KMM model in all tasks 6–10, independent of their degree of risk aversion. Furthermore, the percentage of coherent-ambiguity-averse subjects is lower in the binomial than in the uniform and in the unknown treatments, with only the latter difference being significant. The most part of coherent-ambiguity-loving subjects show a high risk aversion. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Giuseppe Attanasi & Christian Gollier & Aldo Montesano & Noemi Pace, 2014. "Eliciting ambiguity aversion in unknown and in compound lotteries: a smooth ambiguity model experimental study," Theory and Decision, Springer, vol. 77(4), pages 485-530, December.
    • Handle: RePEc:kap:theord:v:77:y:2014:i:4:p:485-530
    DOI: 10.1007/s11238-013-9406-z
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    More about this item

    Keywords

    Coherent-ambiguity aversion; Value-ambiguity aversion ; Choice-ambiguity aversion; Smooth ambiguity model; Binomial distribution; Uniform distribution; Unknown urn; D81; D83; C91;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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