Preferences for the Resolution of Risk and Ambiguity

Abstract

Generalized recursive utility models often imply that agents have a preference over the timing of uncertainty resolution. Laboratory elicitations of subject preferences generally provide direct evidence in support of this implication, but only in the domain of risk. We provide the first experimental examination of uncertainty resolution with respect to ambiguity, in addition to risk. The modal subject exhibits a preference for both early resolution of risk and ambiguity, but with only a minimal willingness to pay to realize either over late resolution. While preferences in both domains are positively correlated, the strength of that correlation varies based on ambiguity attitudes. Of ten, commonly used, representative recursive utility models, either the generalized recursive smooth ambiguity model or the generalized recursive variational preference model best explains our findings. The distinction depends on whether we consider subjects’ token willingness to pay as a true preference or indifference, respectively.

Keywords: uncertainty resolution, risk, ambiguity aversion, recursive utility, experimental economics

JEL Classification: C91, D81