FEEM working papers "Note di lavoro" series
2016 .037

Ellsberg Re-revisited: An Experiment Disentangling Model Uncertainty and Risk Aversion


Authors: Loic Berger, Valentina Bosetti
Series: Mitigation, Innovation and Transformation Pathways
Editor: Massimo Tavoni
Keywords: Ambiguity Aversion, Model Uncertainty, Reduction  of  Compound  Lotteries, Non-expected  Utility, Subjective  Probabilities, Decreasing  Absolute  Ambiguity  Aversion
JEL n.: D81

Abstract

The  results of an experiment  extending Ellsberg's  setup  demonstrate  that attitudes towards ambiguity and compound uncertainty are closely related. However, this association is much stronger when the second layer of uncertainty is subjective than when it is objective. Provided that the compound probabilities are simple enough, we find that most subjects, consisting of both students and policy makers, (1) reduce compound objective probabilities, (2) do not reduce compound subjective probabilities, and (3) are ambiguity non-neutral. By decomposing ambiguity into risk and model uncertainty, and jointly eliciting the attitudes individuals manifest towards these two types of uncertainty, we characterize individuals' degree of ambiguity aversion. Our data provides evidence of decreasing absolute ambiguity aversion and constant relative ambiguity aversion.

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Suggested citation: Berger, L., V. Bosetti, (2016), 'Ellsberg Re-revisited: An Experiment Disentangling Model Uncertainty and Risk Aversion', Nota di Lavoro 37.2016, Milan, Italy: Fondazione Eni Enrico Mattei

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