Measuring Ambiguity Aversion: A Systematic Experimental Approach

SAFE Working Paper No. 55

42 Pages Posted: 22 Jun 2014

See all articles by Jan Pieter Krahnen

Jan Pieter Krahnen

Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Center for Financial Studies (CFS); Centre for Economic Policy Research (CEPR)

Peter Ockenfels

Goethe University Frankfurt - Institute of Economics

Christian Wilde

Goethe University Frankfurt - Department of Finance

Date Written: June 20, 2014

Abstract

This paper provides a systematic analysis of individual attitudes towards ambiguity, based on laboratory experiments. The design of the analysis allows to capture individual behavior across various levels of ambiguity, ranging from low to high. Attitudes towards risk and attitudes towards ambiguity are disentangled, providing pure measures of ambiguity aversion. Ambiguity aversion is captured in several ways, i.e. as a discount factor net of a risk premium, and as an estimated parameter in a generalized utility function. We find that ambiguity aversion varies across individuals, and with the level of ambiguity, being most prominent for intermediate levels. Around one third of subjects show no aversion, one third show maximum aversion, and one third show intermediate levels of ambiguity aversion, while there is almost no ambiguity seeking. While most theoretical work on ambiguity builds on maxmin expected utility, our results provide evidence that MEU does not adequately capture individual attitudes towards ambiguity for the majority of individuals. Instead, our results support models that allow for intermediate levels of ambiguity aversion. Moreover, we find risk aversion to be statistically unrelated to ambiguity aversion on average. Taken together, the results support the view that ambiguity is an important and distinct argument in decision making under uncertainty.

Keywords: ambiguity, valuation discount, experimental economics

JEL Classification: D81, G02

Suggested Citation

Krahnen, Jan Pieter and Ockenfels, Peter and Wilde, Christian, Measuring Ambiguity Aversion: A Systematic Experimental Approach (June 20, 2014). SAFE Working Paper No. 55. Available at SSRN: https://ssrn.com/abstract=2457026 or http://dx.doi.org/10.2139/ssrn.2457026

Jan Pieter Krahnen

Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 33699 (Phone)
+49 69 798 33901 (Fax)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30080 (Phone)
+49 69 798 30077 (Fax)

Center for Financial Studies (CFS) ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30050 (Phone)
+49 69 798 30077 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Peter Ockenfels

Goethe University Frankfurt - Institute of Economics ( email )

In house Post Box 81
Frankfurt am Main 60054
Germany

Christian Wilde (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

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