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

Yang, Chun-Lei and Yao, Lan (2011): Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence.

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.

• Item Type: MPRA Paper
• Language: English
• 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

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