Abstract
We use the multiple price list method and a recursive expected utility theory of smooth ambiguity to separate out attitude towards risk from that towards ambiguity. Based on this separation, we investigate if there are differences in agent behaviour under uncertainty over gain amounts vis-a-vis uncertainty over loss amounts. On an aggregate level, we find that (i) subjects are risk averse over gains and risk seeking over losses, displaying a “reflection effect” and (ii) they are ambiguity neutral over gains and are mildly ambiguity seeking over losses. Further analysis shows that on an individual level, and with respect to both risky and ambiguous prospects, there is limited incidence of a reflection effect where subjects are risk/ambiguity averse (seeking) in gains and seeking (averse) in losses, though this incidence is higher for ambiguous prospects. A very high proportion of such cases of reflection exhibit risk (ambiguity) aversion in gains and risk (ambiguity) seeking in losses, with the reverse effect being significantly present in the case of risk but almost absent in case of ambiguity. Our results suggest that reflection across gains and losses is not a stable individual characteristic, but depends upon whether the form of uncertainty is precise or ambiguous, since we rarely find an individual who exhibits reflection in both risky and ambiguous prospects. We also find that correlations between attitudes towards risk and ambiguity were domain dependent.
Similar content being viewed by others
References
Andersen, S., Harrison, G. W., Lau, M. I., & Rutstrom, E. E. (2005). Elicitation using multiple price list formats. Experimental Economics (forthcoming).
Bernasconi M., Loomes G. (1992) Failures of the reduction principle in an Ellsberg-type problem. Theory and Decision 32: 77–100
Budescu D.V., Kahn K.M., Kramer K.M., Johnson T.R. (2002) Modeling certainty equivalents for imprecise gambles. Organizational Behavior and Human Decision Processes 88: 748–768
Camerer C., Weber M. (1992) Recent developments in modelling preferences: Uncertainty and ambiguity. Journal of Risk and Uncertainty 4: 325–370
Chakravarty, S., Harrison, G. W., Haruvy, E., & Rutstrm, E. E. (2005). Are you risk averse over other people’s money? Working Paper, University of Central Florida, Dept. of Economics, pp. 5–26.
Cooper, D., & Fang, H. (2006). Understanding overbidding in second price auctions: An experimental study. Cowles Foundation Discussion Paper No. 1557.
Cohen M., Jaffray J.-Y., Said T. (1987) Experimental comparisons of individual behaviour under risk and under uncertainty for gains and for losses. Organizational Behavior and Human Decision Processes 39: 1–22
Curley S.P., Yates F. (1985) The center and range of the probability interval as factors affecting ambiguity preference. Organizational Behavior and Human Decision Processes 36: 272–287
Curley S.P., Yates F. (1989) An empirical evaluation of descriptive models of ambiguity reactions in choice situations. Journal of Mathematical Psychology 33: 397–427
Di Mauro C., Maffioletti A. (2004) Attitudes to risk and attitudes to uncertainty: Experimental evidence. Applied Economics 36: 357–372
Du N., Budescu D.V. (2005) The effects of imprecise probabilities and outcomes in evaluating investment options. Management Science 51(12): 1791–1803
Einhorn, H. J., & Hogarth, R. M. (1986). Decision making under ambiguity. Journal of Business, 59(4) (Part 2), 225–250.
Eisenberger R., Weber M. (1995) Willingness-to-pay and willingness-to-accept for risky and ambiguous lotteries. Journal of Risk and Uncertainty 10: 223–233
Ellsberg D. (1961) Risk, ambiguity and the savage axioms. Quarterly Journal of Economics 75: 643–669
Halevy Y. (2007) Ellsberg revisited: An experimental study. Econometrica 75(2): 503–536
Harrison G.W., Johnson E., McInnes M.M., Rutstrom E.E. (2005) Risk aversion and incentive effects: Comment. American Economic Review 95(3): 897–901
Harrison, G. W., & Rutstrom, E. E. (2005). Representative agents in lottery choice experiments: One wedding and a decent funeral. Working Paper, University of Central Florida.
Heston, A., Summers, R., & Aten, B. (2002). Penn World Table Version 6.1, Center for International Comparisons, University of Pennsylvania (CICUP), October.
Hogarth R.M., Einhorn H.J. (1990) Venture theory: A model of decision weights. Management Science 36(7): 780–803
Holt C.A., Laury S.K. (2002) Risk aversion and incentive effects. American Economic Review 92(5): 1644–1655
Kagel J., Levin D. (1993) Independent private value auctions: Bidder behaviour in first, second and third price auctions with varying number of bidders. Economic Journal 103: 868–879
Kagel J., Levin D., Harstad R. (1987) Information impact and allocation rules in auctions with affiliated private values: A laboratory study. Econometrica 55(6): 1275–1304
Kahn B.E., Sarin R.K. (1988) Modelling ambiguity in decisions under uncertainty. Journal of Consumer Research 15: 262–272
Kahneman D., Tversky A. (1979) Prospect theory: An analysis of decisions under risk. Econometrica 47: 313–327
Klibanoff P., Marinacci M., Mukerji S. (2005) A smooth model of decision making under ambiguity. Econometrica 73(6): 1849–1892
Lauriola M., Levin I.P. (2001) Relating individual differences in attitude toward ambiguity and risky choices. Journal of Behavioral Decision Making 14(2): 107–122
Laury, S., & Holt, C. A. (2005). Further reflections on Prospect Theory. Andrew Young School of Policy Studies Research Paper Series No. 06–11.
MacCrimmon, K. R., & Larsson, S. (1979). Utility theory: Axioms versus paradoxes. In M. Allais & O. Hagen (Eds.), The expected utility hypothesis and the Allais Paradox (pp. 333–409). Dordrecht, Holland: D. Reidel.
Schneweiss H. (1973) The Ellsberg Paradox from the point of view of Game Theory. Inference and Decision 1: 65–78
Tversky A., Kahneman D. (1992) Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5(4): 297–323
Viscusi W.K., Chesson H. (1999) Hopes and Fears: The conflicting effects of risk ambiguity. Theory and Decision 47: 153–178
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Chakravarty, S., Roy, J. Recursive expected utility and the separation of attitudes towards risk and ambiguity: an experimental study. Theory Decis 66, 199–228 (2009). https://doi.org/10.1007/s11238-008-9112-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11238-008-9112-4