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.
We have now more than 500 observations from three cases, the Norwegian Policy rate, the Iowa Republican caucuses with Trump as a candidate and the Academy awards (Oscar). All studies show some degree of aversion to 50% lotteries, and the effect is significant at 1% level when we use data from all studies. Subject also show a strong tendency to bet on their favorite (most probable outcome of the event), which may be due to consistency. Finally we also find a general strong preference for lotteries over ambiguous gambles.
The aversion to 50% lotteries is very puzzling: 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. Bu as we only collect data on choices between risky lotteries and gambles on natural events, we do not know if the same aversion can be extended beyond such choices. We plan to collect even more data to see if the same aversion can be observed in choices between only risky lotteries.