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

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  • Yang, Chun-Lei
  • Yao, Lan

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.

Suggested Citation

  • Yang, Chun-Lei & Yao, Lan, 2011. "Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence," MPRA Paper 28531, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:28531
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    References listed on IDEAS

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    More about this item

    Keywords

    Ellsberg paradox; Ambiguity; Second-order risk; Second-order preference theory; Experiment;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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