Learning Under Uncertainty with Multiple Priors: Experimental Investigation

Abstract

We run an experiment to compare belief formation and learning under compound risk and under ambiguity at the individual level. We estimate a four-type mixture model assuming that subjects may either follow Bayes Rule or behave according to the multiple priors model of Epstein and Schneider (2007) for each type of uncertainty. Our results indicate that majority of subjects are Bayesian, both under compound risk and under ambiguity, while the second most frequent type are subjects that are Bayesian under compound risk but who use multiple priors model of learning under ambiguity. In addition, we find strong evidence against a common assumption that participants' initial beliefs (and priors) are consistent with information provided about the uncertain process.