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Learning about the Ellsberg Paradox reduces, but does not abolish, ambiguity aversion

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  • Ruonan Jia
  • Ellen Furlong
  • Sean Gao
  • Laurie R Santos
  • Ifat Levy

Abstract

Ambiguity aversion–the tendency to avoid options whose outcome probabilities are unknown—is a ubiquitous phenomenon. While in some cases ambiguity aversion is an adaptive strategy, in many situations it leads to suboptimal decisions, as illustrated by the famous Ellsberg Paradox. Behavioral interventions for reducing ambiguity aversion should therefore be of substantial practical value. Here we test a simple intervention, aimed at reducing ambiguity aversion in an experimental design, where aversion to ambiguity leads to reduced earnings. Participants made a series of choices between a reference lottery with a 50% chance of winning $5, and another lottery, which offered more money, but whose outcome probability was either lower than 50% (risky lottery) or not fully known (ambiguous lottery). Similar to previous studies, participants exhibited both risk and ambiguity aversion in their choices. They then went through one of three interventions. Two groups of participants learned about the Ellsberg Paradox and their own suboptimal choices, either by actively calculating the objective winning probability of the ambiguous lotteries, or by observing these calculations. A control group learned about base-rate neglect, which was irrelevant to the task. Following the intervention, participants again made a series of choices under risk and ambiguity. Participants who learned about the Ellsberg Paradox were more tolerant of ambiguity, yet ambiguity aversion was not completely abolished. At the same time, these participants also exhibited reduced aversion to risk, suggesting inappropriate generalization of learning to an irrelevant decision domain. Our results highlight the challenge for behavioral interventions: generating a strong, yet specific, behavioral change.

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  • Ruonan Jia & Ellen Furlong & Sean Gao & Laurie R Santos & Ifat Levy, 2020. "Learning about the Ellsberg Paradox reduces, but does not abolish, ambiguity aversion," PLOS ONE, Public Library of Science, vol. 15(3), pages 1-24, March.
  • Handle: RePEc:plo:pone00:0228782
    DOI: 10.1371/journal.pone.0228782
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    References listed on IDEAS

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    1. Richard J. Arend, 2020. "Strategic decision-making under ambiguity: a new problem space and a proposed optimization approach," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1231-1251, November.

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