Eliciting Ambiguity Aversion in Unknown and in Compound Lotteries: A KMM Experimental Approach
Ca’ Foscari University of Venice Department of Economics Working Paper No. 23/WP/2012
48 Pages Posted: 3 Oct 2012 Last revised: 6 Dec 2012
Date Written: September 1, 2012
Abstract
We define coherent-ambiguity aversion within the Klibanoff, Marinacci and Mukerji (2005) smooth ambiguity model (henceforth KMM) as the combination of choice-ambiguity aversion and value-ambiguity aversion. We analyze theoretically five ambiguous decision tasks, where a subject faces two-stage lotteries with binomial, uniform or unknown second-order probabilities. We check our theoretical predictions through a 10-task laboratory experiment. In (unambiguous) tasks 1-5, we elicit risk aversion both through a portfolio choice method and through a BDM mechanism. In (ambiguous) tasks 6-10, we elicit choice-ambiguity aversion through the portfolio choice method and value-ambiguity aversion through the BDM mechanism. We find that more than 75% of classified subjects behave according to the KMM model in all tasks 6-10, independent of their degree of risk aversion. Further, the percentage of coherently-ambiguity-averse subjects is lower in the binomial than in the uniform and in the unknown treatment, with only the latter difference being significant. Finally, highly-risk-averse subjects are more prone to coherent-ambiguity.
Keywords: coherent-ambiguity aversion, value-ambiguity aversion, choice-ambiguity aversion, smooth ambiguity model, binomial distribution, uniform distribution, unknown urn
JEL Classification: D81, D83, C91
Suggested Citation: Suggested Citation
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