Consider the following choice problem, known as “Ellsberg’s three-color urn example”, or simply the “Ellsberg Paradox” (Ellsberg [7]). An urn contains 30 red balls, and 60 green and blue balls, in unspecified proportions; subjects are asked to compare (i) a bet on a red draw vs. a bet on a green draw, and (ii) a bet on a red or blue draw vs. a bet on a green or blue draw. If the subject wins a ...

In this paper, I will examine two different approaches to an experimental decision problem posed by Craig Fox and Amos Tversky. This decision problem is intended to illustrate the phenomenon called “ambiguity aversion” that is observed in decision situations under uncertainty. These situations occur when an agent is faced with a decision problem where the probabilities are not specified in adva...

We consider the class of concave distortion risk measures to study how choice is influenced by the decision-maker’s attitude to risk and provide comparative static results. We also assume ambiguity about the probability distribution of the risk and consider a framework à la Klibanoff, Marinacci, and Mukerji (2005) to study the value of information that resolves ambiguity. We show that this valu...

Risk aversion and decreasing absolute risk aversion play prominent roles in the expected utility theory of demand for insurance against a known risk of accident losses. Demand for insurance against an accident risk that is not known with certainty depends on the attitude toward bearing this ambiguity as well as the underlying risk. Ambiguity aversion in the recursive model developed by Klibanof...

We develop a tractable method to estimate multiple prior models of decision-making under ambiguity. In a representative sample of the U.S. population, we measure ambiguity attitudes in the gain and loss domains. We find that ambiguity aversion is common for uncertain events of moderate to high likelihood involving gains, but ambiguity seeking prevails for low likelihoods and for losses. We show...

The Working Papers should not be reported as representing the views of the Banco Central do Brasil. The views expressed in the papers are those of the author(s) and do not necessarily reflect those of the Banco Central do Brasil. This paper characterizes ambiguity averse preferences in the absence of the completeness axiom. We axiomatize multiple selves versions of some of the most important ex...

Abstract We empirically show that sample information not only moderates prospects’ outcome ambiguity but also decision makers’ revealed aversion of them. Since most natural prospects permit at least some inference, accounting for their degree improves prediction aversion. The special case full ambiguity, as in Ellsberg-type designs, is typically averted—yet many makers systematically like low d...

In many decisions under uncertainty, the decision maker has only vague information about the probabilities of potential outcomes of her actions. Following Ellsberg (1961), such situations with unknown or uncertain probabilities are often called ambiguous, to distinguish them from situations with objectively known probabilities, which are typically called risky. Ellsberg’s 1961 article suggested...

In this paper, ambiguity aversion to uncertain survival probabilities is introduced in a life-cycle model with a bequest motive to study the optimal demand for annuities. Provided that annuities return is sufficiently large, and notably when it is fair, positive annuitization is optimal in the ambiguity neutrality limit case. Conversely, the optimal strategy is to sell annuities in case of infi...