Ambiguity aversion

Several papers have studied the impact of ambiguity aversion on optimal climate policy. The idea of ambiguity aversion was introduced by Ellsberg (1961), and a mathematical representation, suggested by Gilboa and Schmeidler (1989) is that under ambiguity, subject assign subjective probability to single events in a manner that does not add to 100% when adding over all possible events. By contrast, Riege and Teigen (2013) find that when subjects are asked to state probabilities in ambiguous lotteries, they typically state probabilities that add to much more than 100%, indicating a strong ambiguity seeking.The idea of this project is to make a design as close as possible to Riege and Teigen, but add incentivized lottery choices.

The preliminary results, based on 80 observations, are twofold. First, this method seems to give stronger ambiguity aversion than previously found. One possible reason for this is that in choosing between ambiguous gambles and objective lotteries, the method we use makes additivity less salient. A second finding is: objective lotteries with well-defined 50% winning probabilities seem to be considered as if they were ambiguous. In a choice between an ambiguous gamble and a lottery with well-defined winning probability, the lottery appears to be less attractive with 50% winning chance than with 30% or 40% winning chance. As the 50%-50% lotteries are much used in empirical studies, this may have significant methodological implications.


Published June 8, 2017 1:02 PM - Last modified June 10, 2017 5:25 PM