Ambiguity Aversion, Comparative Ignorance, and Decision Context

Abstract

People typically find bets less attractive when the probability of receiving a prize is more vague or ambiguous (Ellsberg, 1961). According to Fox and Tversky's (1995) comparative ignorance hypothesis, ambiguity aversion is driven by the comparison with more familiar events or more knowledgeable individuals, and diminishes or disappears in the absence of such a comparison. In this paper we emphasize that “comparative ignorance” refers to the state of mind of the decision maker. We extend the comparative ignorance hypothesis by documenting four new ways in which decision context can affect willingness to act under uncertainty that do not rely on the comparative-noncomparative evaluation paradigm used in previous studies. First, people find uncertain bets more attractive when preceded by questions about less familiar items than when preceded by questions about more familiar items. Second, the preference to bet on more familiar domains is less pronounced for the first domain evaluated on a survey than for later domains. Third, people find bets less attractive when they are provided with diagnostic information that they do not know how to use, compared to when they are provided with no such information. Finally, people are sensitive to the relative competence of their counterpart when playing a simple competitive (matching pennies) game, but not when playing a noncompetitive (coordination) game that has the same mixed strategy Nash equilibrium.