Preferences for the Resolution of Risk and Ambiguity

41 Pages Posted: 2 May 2022

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

Texas A&M University - Department of Economics

Date Written: April 24, 2022

Abstract

Models of generalized recursive utility are becoming increasingly common as alternatives to discounted expected utility theory. These models have successfully explained 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. However, all previous experimental studies have only elicited preferences over uncertainty resolution in the domain of objective uncertainty, i.e., risk. By definition, uncertainty includes both objective and subjective domains. Further, not all generalized recursive utility models can accommodate preferences over uncertainty in both domains. For these reasons, 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 of Hayashi and Miao (2011) can plausibly explain the entirety of these experimental findings.

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 (April 24, 2022). 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

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

5201 University Blvd.
College Station, TX 77843-4228
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
121
Abstract Views
323
Rank
352,620
PlumX Metrics