You Need to Recognize Ambiguity to Avoid it

38 Pages Posted: 16 Oct 2013 Last revised: 1 Mar 2016

Soo Hong Chew

National University of Singapore; National University of Singapore; HKUST

Mark Ratchford

Vanderbilt University - Marketing

Jacob S. Sagi

University of North Carolina Kenan-Flagler Business School

Date Written: October 14, 2013

Abstract

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

Chew, Soo Hong and Ratchford, Mark and Sagi, Jacob S., You Need to Recognize Ambiguity to Avoid it (October 14, 2013). Vanderbilt Owen Graduate School of Management Research Paper No. 2340543. Available at SSRN: https://ssrn.com/abstract=2340543 or http://dx.doi.org/10.2139/ssrn.2340543

Soo Hong Chew

National University of Singapore ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HKUST ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Mark Ratchford

Vanderbilt University - Marketing ( email )

Nashville, TN 37203
United States
615-322-6814 (Phone)

Jacob Sagi (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/sagij/

Paper statistics

Downloads
146
Rank
160,880
Abstract Views
1,067