FEEM working papers "Note di lavoro" series
2018 .024

Three Layers of Uncertainty: an Experiment


Authors: Ilke Aydogan, Loϊc Berger, Valentina Bosetti, Ning Liu
Series: Economic Theory
Editor: Matteo Manera
Keywords: Ambiguity Aversion, Reduction of Compound Lotteries, Non-expected Utility, Model Uncertainty, Model Misspecification
JEL n.: D81

Abstract

We experimentally explore decision-making under uncertainty using a framework that decomposes uncertainty into three distinct layers: (1) physical uncertainty, entailing inherent randomness within a given probability model, (2) model uncertainty, entailing subjective uncertainty about the probability model to be used and (3) model misspecification, entailing uncertainty about the presence of the true probability model among the set of models considered. Using a new experimental design, we measure individual attitudes towards these di erent layers of uncertainty and study the distinct role of each of them in characterizing ambiguity attitudes. In addition to providing new insights into the underlying processes behind ambiguity aversion -failure to reduce compound probabilities or distinct attitudes towards unknown probabilities- our study provides the first empirical evidence for the intermediate role of model misspecification between model uncertainty and Ellsberg in decision-making under uncertainty.

***

Suggested citation: Aydogan, I., L. Berger, V. Bosetti, N. Liu, (2018), 'Three Layers of Uncertainty: an Experiment ', Nota di Lavoro 24.2018, Milano, Italy: Fondazione Eni Enrico Mattei

Download file
Download PDF file

FEEM Update

Subscribe to stay connected.

Your personal data will be processed by Fondazione Eni Enrico Mattei. – data Controller – with the aim of emailing the FEEM newsletter. The use of Your email address is necessary for the implementation of the newsletter service. You are invited to read the Privacy Policy in order to obtain additional information about the protection of Your rights.

This Website uses technical cookies and cookie analytics, as well as “third party” profiling cookies.
If you close this banner or you decide to continue navigating on this Website, you express consent to the use of cookies. If you need additional information or you wish to express selective choices on the use of cookies, please refer to the   Cookie PolicyI agree