Preferences for the Resolution of Risk and Ambiguity

68 Pages Posted: 2 May 2022 Last revised: 13 Oct 2023

See all articles by Alexander L. Brown

Alexander L. Brown

Texas A&M University - Department of Economics

Huiyi Guo

Texas A&M University - Department of Economics

Hyundam Je

The University of Sydney

Date Written: October 12, 2023

Abstract

Generalized recursive utility models are becoming increasingly common alternatives to discounted expected utility theory. Such models can explain many so-called, “anomalies” in field data, but 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 objective uncertainty, i.e., risk. We provide the first experimental examination of uncertainty resolution with respect to subjective uncertainty, i.e., ambiguity, in addition to risk. We find that subjects most frequently exhibit a preference for early resolution of both risk and ambiguity and these preferences are positively correlated. Additionally, being ambiguity seeking decreases the probability of preferring early resolution of ambiguity. Of six, commonly-used, representative recursive utility models, only the generalized recursive smooth ambiguity model (Hayashi and Miao, 2011) can accommodate these main findings. However, when we penalize models for the area of action space they can rationalize, the maxmin expected utility model (Hayashi, 2005) characterizes subject data equally well.

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

JEL Classification: C91, D81

Suggested Citation

Brown, Alexander L. and Guo, Huiyi and Je, Hyundam, Preferences for the Resolution of Risk and Ambiguity (October 12, 2023). Available at SSRN: https://ssrn.com/abstract=4092231 or http://dx.doi.org/10.2139/ssrn.4092231

Alexander L. Brown

Texas A&M University - Department of Economics ( email )

4228 TAMU
College Station, TX 77843-4228
United States
979-862-8084 (Phone)
979-847-8757 (Fax)

HOME PAGE: http://econweb.tamu.edu/abrown/

Huiyi Guo (Contact Author)

Texas A&M University - Department of Economics ( email )

2935 Research Parkway
250 Liberal Arts Social Sciences Building
College Station, TX 77843-4228
United States
979-847-8757 (Fax)

HOME PAGE: http://guohuiyi.com

Hyundam Je

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

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