You Need to Recognize Ambiguity to Avoid it
38 Pages Posted: 16 Oct 2013 Last revised: 1 Mar 2016
Date Written: October 14, 2013
We study the influence of attention and comprehension on ambiguity attitudes. Subjects are presented with screening questions before choosing between two alternatives represented by payoff-matrices which are essentially equivalent to those in Ellsberg’s (1961) two-urn problem. The observed rate of ambiguity aversion for the standard two-urn problem is similar to what is reported in the literature regardless of the level of comprehension. When facing the essentially equivalent yet more complex matrix-based choice task, high-comprehension subjects continue to exhibit ambiguity aversion typical of the standard two-urn problem while low-comprehension subjects appear to behave randomly. We also classify subjects as “probability minded” or “ambiguity minded” based on whether they assign probabilities to draws from a deck of cards with unknown composition during the screening phase. High-comprehension subjects who are ambiguity-minded are far more likely to be ambiguity averse than those who are probability-minded. Significantly, subject “mindedness” appears to explain ambiguity attitudes an order of magnitude more than all other demographic characteristics combined. Contrary to intuition about subjects’ sophistication, ambiguity-minded high-comprehension subjects are younger, more educated, more analytic, and more reflective about their choices compared with their probability-minded counterparts.
Keywords: Ellsberg Paradox, Uncertainty, Ambiguity, Behavioral
JEL Classification: D03, G02, D83
Suggested Citation: Suggested Citation