IDEAS home Printed from https://ideas.repec.org/a/wly/quante/v8y2017i1p219-238.html
   My bibliography  Save this article

Testing ambiguity theories with a mean‐preserving design

Author

Listed:
  • Chun‐Lei Yang
  • Lan Yao

Abstract

Prominent models such as maxmin expected utility/alpha‐multiprior (MEU/ α‐MP) and Klibanoff, Marinacci, and Mukerji (KMM) interpret ambiguity aversion as aversion against second‐order risks associated with ambiguous acts. We design an experiment where the decision maker draws twice with replacement in the typical Ellsberg two‐color urns, but with a different color winning each time. Given this set of mean‐preserving prospects, MEU/α‐MP, KMM, and Savage's subjective expected utility all predict unequivocally that risk‐averse decision makers (DMs) will avoid the 50–50 urn that exhibits the highest risk conceivable, while risk‐seeking DMs do the opposite. However, we observe a substantial number of violations in the experiments. It appears that the ambiguity premium is partially paid to avoid the ambiguity issue per se, which is distinct from notions of second‐order risk. This finding is robust even when there is only partial ambiguity, and is applicable to all models that satisfy a monotonicity condition.

Suggested Citation

  • Chun‐Lei Yang & Lan Yao, 2017. "Testing ambiguity theories with a mean‐preserving design," Quantitative Economics, Econometric Society, vol. 8(1), pages 219-238, March.
    • Handle: RePEc:wly:quante:v:8:y:2017:i:1:p:219-238
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christoph Kuzmics & Brian W. Rogers & Xiannong Zhang, 2019. "Is Ellsberg behavior evidence of ambiguity aversion?," Graz Economics Papers 2019-07, University of Graz, Department of Economics.
    2. Masaki Aoyagi & Takehito Masuda & Naoko Nishimura, 2021. "Strategic Uncertainty and Probabilistic Sophistication," ISER Discussion Paper 1117, Institute of Social and Economic Research, Osaka University.
    3. Christoph Kuzmics & Brian W. Rogers & Xiannong Zhang, 2024. "Randomization advice and ambiguity aversion," Journal of Risk and Uncertainty, Springer, vol. 69(1), pages 85-104, August.
    4. Brian Jabarian & Simon Lazarus, 2023. "A Two-Ball Ellsberg Paradox," CESifo Working Paper Series 10745, CESifo.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:quante:v:8:y:2017:i:1:p:219-238. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.