Eliciting Ambiguity Aversion in Unknown and in Compound Lotteries: A KMM Experimental Approach

Ca’ Foscari University of Venice Department of Economics Working Paper No. 23/WP/2012

48 Pages Posted: 3 Oct 2012 Last revised: 6 Dec 2012

See all articles by Giuseppe Attanasi

Giuseppe Attanasi

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG)

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Aldo Montesano

Bocconi University - Department of Economics

Noemi Pace

Ca Foscari University of Venice - Department of Economics

Date Written: September 1, 2012

Abstract

We define coherent-ambiguity aversion within the Klibanoff, Marinacci and Mukerji (2005) smooth ambiguity model (henceforth KMM) as the combination of choice-ambiguity aversion and value-ambiguity aversion. We analyze theoretically five ambiguous decision tasks, where a subject faces two-stage lotteries with binomial, uniform or unknown second-order probabilities. We check our theoretical predictions through a 10-task laboratory experiment. In (unambiguous) tasks 1-5, we elicit risk aversion both through a portfolio choice method and through a BDM mechanism. In (ambiguous) tasks 6-10, we elicit choice-ambiguity aversion through the portfolio choice method and value-ambiguity aversion through the BDM mechanism. We find that more than 75% of classified subjects behave according to the KMM model in all tasks 6-10, independent of their degree of risk aversion. Further, the percentage of coherently-ambiguity-averse subjects is lower in the binomial than in the uniform and in the unknown treatment, with only the latter difference being significant. Finally, highly-risk-averse subjects are more prone to coherent-ambiguity.

Keywords: coherent-ambiguity aversion, value-ambiguity aversion, choice-ambiguity aversion, smooth ambiguity model, binomial distribution, uniform distribution, unknown urn

JEL Classification: D81, D83, C91

Suggested Citation

Attanasi, Giuseppe and Gollier, Christian and Montesano, Aldo and Pace, Noemi, Eliciting Ambiguity Aversion in Unknown and in Compound Lotteries: A KMM Experimental Approach (September 1, 2012). Ca’ Foscari University of Venice Department of Economics Working Paper No. 23/WP/2012. Available at SSRN: https://ssrn.com/abstract=2156196 or http://dx.doi.org/10.2139/ssrn.2156196

Giuseppe Attanasi

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG) ( email )

250, rue Albert Einstein
Valbonne, 06560
France

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 61 12 86 30 (Phone)
+33 61 12 86 37 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Aldo Montesano

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Noemi Pace (Contact Author)

Ca Foscari University of Venice - Department of Economics ( email )

Cannaregio 873
Venice, 30121
Italy

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