Ellsberg's Hidden Paradox

39 Pages Posted: 21 Jul 2019 Last revised: 29 Jul 2019

See all articles by Sean Crockett

Sean Crockett

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Julian C. Jamison

University of Exeter Business School - Department of Economics; World Bank eMBeD (Mind, Behavior, and Development); Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); Innovations for Poverty Action

Date Written: July 20, 2019

Abstract

Ellsberg (1961) proposes two alternative frames to elicit individuals' preferences for ambiguity. Through an experiment, we find that Ellsberg's three-color one-urn frame induces very different revealed preferences than the two-color two-urn frame. In both frames, we document ambiguity aversion for likely gains and (weak) ambiguity seeking for unlikely gains. The intensity of both these attitudes, however, is strongly curbed in the three-color frame. These findings may imply that perceived probabilities are biased toward uniformly distributed states and consequences, introducing a tension between them in the three-color frame. Surprisingly, we find that subjects who are simply asked to fill urns with colored bingo chips for a fixed payment also reveal a similar uniformity bias. We argue that both urn fillers and incentivized decision makers are influenced by similar perceptually salient features of probability intervals. Our findings have important implications for decision theory, and, by extension, for economic, financial, political, and medical decisions.

Keywords: Perceived probabilities, ambiguity, Knightian uncertainty, experiment, framing, judgment and decision making

JEL Classification: C91, D81, D91

Suggested Citation

Crockett, Sean and Izhakian, Yehuda (Yud) and Jamison, Julian C., Ellsberg's Hidden Paradox (July 20, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-07-04. Available at SSRN: https://ssrn.com/abstract=3423534 or http://dx.doi.org/10.2139/ssrn.3423534

Sean Crockett

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

Zicklin School of Business
55 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://www.seanmcrockett.com

Yehuda (Yud) Izhakian (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

Julian C. Jamison

University of Exeter Business School - Department of Economics ( email )

Streatham Court
Exeter, EX4 4RJ
United Kingdom

World Bank eMBeD (Mind, Behavior, and Development) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

30 Wadsworth Street, E53-320
77 Massachusetts Avenue
Cambridge, MA 02142
United States

Innovations for Poverty Action ( email )

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

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