Date of This Version
4-28-2016
Abstract
The results of an experiment extending Ellsberg’s setup demonstrate that attitudes towards ambiguity and compound uncertainty are closely related. However, this association is much stronger when the second layer of uncertainty is subjective than when it is objective. Provided that the compound probabilities are simple enough, we find that most subjects, consisting of both students and policy makers, (1) reduce compound objective probabilities, (2) do not reduce compound subjective probabilities, and (3) are ambiguity non-neutral. By decomposing ambiguity into risk and model uncertainty, and jointly eliciting the attitudes individuals manifest towards these two types of uncertainty, we characterize individuals’ de- gree of ambiguity aversion. Our data provides evidence of decreasing absolute ambiguity aversion and constant relative ambiguity aversion.
Recommended Citation
Berger, Loïc and Bosetti, Valentina, "Ellsberg re-revisited: An experiment disentangling model uncertainty and risk aversion" (April 28, 2016). Fondazione Eni Enrico Mattei Working Papers. Paper 1434.
https://services.bepress.com/feem/paper1434