Learning Under Compound Risk vs . Learning Under Ambiguity - An Experiment . 1

We design and conduct an economic experiment to investigate the learning process of the agents under compound risk and under ambiguity. We gather data for subjects choosing between lotteries involving risky and ambiguous urns. Decisions are made in conjunction with a sequence of random draws with replacement, allowing us to estimate the beliefs of the agents at different moments in time. For each of the urn types we estimate a behavioral updating model for which the standard Bayesian updating model is a particular case. Our findings suggest an important difference in updating behavior between risky and ambiguous environments. Specifically, after controlling for the initial prior, when updating under ambiguity subjects significantly overweight the new signal, while when updating under compound risk subjects are essentially Bayesian. JEL Classification Codes: C81, C91, D81, D83