Signaling Probabilities in Ambiguity: On the Impact of Vague News

Abstract

Vague, or imprecise, news may affect decisions by changing either the fundamentals, or the associated uncertainty, or both. We show response to vague news is shaped by ambiguity attitudes, yet with qualitative differences for different levels of risk, on top of ambiguity, conveyed. The decision functional consists of a probabilistic term and an ambiguity premium; the latter depends on both risk and ambiguity, implying differential responses of ambiguity-neutral, -averse and -seeking subjects to probabilistic, as well as non-probabilistic news. In a two-color Ellsberg experiment with signals we obtain ambiguity attitudes matter more for non-probabilistic and less for probabilistic, though still imprecise news. For vague news conveying a relatively high probability of success, subjects exhibit insensitivity to the ambiguity component, unless explicitly facing similar news of different degrees of precision. Possible explanation is in either flat ambiguity premiums, or the cognitive inability to process the risky and the ambiguous components simultaneously.

Keywords: Ambiguity-Aversion, Ambiguity Premium, Ellsberg Experiment, Vague News

JEL Classification: C90, D01, D81