Ruhr Economic Papers

Ruhr Economic Papers #440

Intuition and Reasoning in Choosing Ambiguous and Risky Lotteries

by Ralf Bergheim and Michael W.M. Roos

RUB, 09/2013, 33 S./p., 8 Euro, ISBN 978-3-86788-497-6 DOI: 10.4419/86788497

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Abstract

This paper focuses on information acquisition and individual decision making in ambiguous situations and presents a novel experimental design which may help to tackle open questions from a fresh perspective. Instead of giving subjects the choice between risky and ambiguous Ellsberg urns, we let them choose between a safe option and a risky lottery, whose risk is a priori unknown to subjects. By acquiring information about the probability distribution of the lottery’s payoffs, subjects can reduce or even eliminate the ambiguity and turn the decision situation into one of risk. Under the assumption that an ambiguity averse subject should reduce ambiguity within a decision process we predicted that these subjects would request more information. Moreover, we investigate whether the relation between attitudes towards risk and ambiguity is linked to intuitive and deliberate thinking.

Based on a detailed analysis of subjects’ information acquisition and decision processes we do not find that those subjects showing ambiguity aversion in an urn experiment based on Halevy (2007) significantly reduce the ambiguity more than others. More intuitive subjects acquire less information and are more likely to avoid the risky lottery. Intuition seems to be negatively correlated with risk aversion, but not with ambiguity aversion. Moreover, we find a positive correlation between risk and ambiguity aversion.

JEL-Classification: C91, D03, D81

Keywords: Ambiguity aversion; risk aversion; uncertainty; experiment; decision making; binary system of thinking

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