Yang, Chun-Lei and Yao, Lan (2011): Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence.
Download (235kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence|
|English Title:||Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence|
|Keywords:||Ellsberg paradox, Ambiguity, Second-order risk, Second-order preference theory, Experiment|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Lan YAO|
|Date Deposited:||01. Feb 2011 19:32|
|Last Modified:||11. Feb 2013 18:11|
Becker, G. M., M. H. DeGroot, and J. Marschak (1964): “Measuring Utility by a Single Response Sequential Method,” Behavioral Science, 9, 226–232.
Camerer, C., and M. Weber (1992): “Recent Developments in Modeling Preferences: Uncertainty and Ambiguity,” Journal of Risk and Uncertainty, 5, 325-37.
Casadesus-Masanell, R., P. Klibanoff, and E. Ozdenoren (2000): “Maxmin Expected Utility over Savage Acts with a Set of Priors,” Journal of Economic Theory, 92, 35–65.
Chen, H., N. Ju, and J. Miao (2009): “Dynamic Asset Allocation with Ambiguous Return Predictability,” http://people.bu.edu/miaoj/portfolio57.pdf
Chew, S. H., E. Karni, and Z. Safra (1987): “Risk Aversion in the Theory of Expected Utility with Rank-Dependent Probabilities,” Journal of Economic Theory, 42, 370–381.
Chow, C. C., and R. K. Sarin (2002): “Known, Unknown and Unknowable Uncertainties,” Theory and Decision, 52, 127–138.
Eichberger, J., and D. Kelsey (2009): “Ambiguity”, in P. Anand, P. Pattanaik and C. Puppes (eds.), Handbook of Rational and Social Choice, OUP.
Ellsberg, D. (1961): “Risk, Ambiguity and the Savage Axioms,” Quarterly Journal of Economics, 75, 643-669.
Ergin, H., and F. Gul (2009): “A Subjective Theory of Compound Lotteries,” Journal of Economic Theory, 144, 899-929.
Fox, C. R., and A. Tversky (1995): “Ambiguity Aversion and Comparative Ignorance,” Quarterly Journal of Economics, 110, 585-603.
Gilboa, I., and Schmeidler, D. (1989): “Maxmin Expected Utility with a Non-Unique Prior,” Journal of Mathematical Economics 18, 141-153.
Halevy, Y. (2007): “Ellsberg Revisited: An Experimental Study,” Econometrica, 75, 503-536.
Halevy, Y., and V. Feltkamp (2005): “A Bayesian Approach to Uncertainty Aversion,” Review of Economic Studies, 72, 449–466.
Hansen, L.P. (2007): “Beliefs, Doubts and Learning: The Valuation of Macroeconomic Risk,” American Economic Review 97, 1144-1152.
Hansen, L.P., and T.J. Sargent (2008): “Fragile Beliefs and the Price of Model Uncertainty,” http://economics.uchicago.edu/pdf/hansen2_052506.pdf .
Harrison, G. W., and E. E. Rutstrom (2008): “Risk Aversion in Experiments,” Research in Experimental Economics, 12, 41-196.
Heath, C., and A. Tversky (1991): “Preference and Belief: Ambiguity and Competence in Choice under Uncertainty,” Journal of Risk and Uncertainty, 4, 5-28.
Holt, C. A., and S. K. Laury (2002): “Risk Aversion and Incentive Effects,” American Economic Review, 92, 1644–1655.
Hsu, M., M. Bhatt, R. Adolphs, D. Tranel, and C.F. Camerer (2005): “Neural Systems Responding to Degrees of Uncertainty in Human Decision-Making,” Science, 310, 1680-1683.
Huettel, S.A., C.J. Stowe, E.M. Gordon, B.T. Warner, and M.L. Platt (2006): “Neural signatures of economic preferences for risk and ambiguity,” Neuron, 49:765–775. Ju, N. and J. Miao, (2009): “Ambiguity, Learning, and Asset Returns,” mimeo, http://idei.fr/doc/conf/tse/papers/miao.pdf.
Klibanoff, P., M. Marinacci, and S. Mukerji (2005): “A Smooth Model of Decision Making under Ambiguity,” Econometrica, 73, 1849–1892.
Nau, R. F. (2006): “Uncertainty Aversion with Second-Order Utilities and Probabilities,” Management Science, 52, 136–145.
Sapienza, P., L. Zingales and D. Maesripieri (2009): “Gender Difference in Financial Risk Aversion and Career Choices are Affected by Testosterone,” PNAS, 106, 15268-15273.
Savage, L. J. (1954): The Foundations of Statistics. John Wiley & Sons, New York.
Schmeidler, D. (1989): “Subjective Probability and Expected Utility without Additivity,” Econometrica 57: 571-587.
Segal, U. (1987): “The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach,” International Economic Review, 28, 175–202.
Segal, U. (1990): “Two-Stage Lotteries without the Reduction Axiom,” Econometrica, 58, 349–377.
Seo, K. (2009): “Ambiguity and Second Order Belief,” Econometrica, 77(5), 1575-1605.
Stecher, J., T. Shields and J. Dickhaut (2010): “Generating Ambiguity in the Laboratory,” mimeo.
Weber, E. U., and E. J. Johnson (2008): “Decisions under Uncertainty: Psychological, Economic, and Neuroeconomic Explanations of Risk Preference”, In: P. Glimcher, C. Camerer, E. Fehr, and R. Poldrack (Eds.), Neuroeconomics: Decision Making and the Brain. New York: Elsevier.