Ellsberg Re-Revisited: An Experiment Disentangling Model Uncertainty and Risk Aversion

43 Pages Posted: 24 May 2016

See all articles by Loic Berger

Loic Berger

CNRS; IÉSEG School of Management, Lille Campus; RFF-CMCC European Institute on Economics and the Environment

Valentina Bosetti

Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change

Date Written: May 24, 2016

Abstract

The results of an experiment extending Ellsberg's setup demonstrate that attitudes towards ambiguity and compound uncertainty are closely related. However, this association is much stronger when the second layer of uncertainty is subjective than when it is objective. Provided that the compound probabilities are simple enough, we find that most subjects, consisting of both students and policy makers, (1) reduce compound objective probabilities, (2) do not reduce compound subjective probabilities, and (3) are ambiguity non-neutral. By decomposing ambiguity into risk and model uncertainty, and jointly eliciting the attitudes individuals manifest towards these two types of uncertainty, we characterize individuals' degree of ambiguity aversion. Our data provides evidence of decreasing absolute ambiguity aversion and constant relative ambiguity aversion.

Keywords: Ambiguity Aversion, Model Uncertainty, Reduction of Compound Lotteries, Non-expected Utility, Subjective Probabilities, Decreasing Absolute Ambiguity Aversion

JEL Classification: D81

Suggested Citation

Berger, Loic and Bosetti, Valentina, Ellsberg Re-Revisited: An Experiment Disentangling Model Uncertainty and Risk Aversion (May 24, 2016). FEEM Working Paper No. 37.2016, Available at SSRN: https://ssrn.com/abstract=2783677 or http://dx.doi.org/10.2139/ssrn.2783677

IÉSEG School of Management, Lille Campus ( email )

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Lille, 59000
France

RFF-CMCC European Institute on Economics and the Environment ( email )

Valentina Bosetti

Bocconi University

Via Gobbi 5
Milan, 20136
Italy

CMCC - Euro Mediterranean Centre for Climate Change

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Lecce, I-73100
Italy

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