Abstract
This paper analyses decision making under uncertainty when uncertain situations can be described as a Lotto lottery. In a Lotto lottery, the probability of winning a prize is objectively known, but the size of the prize is unknown. This paper first proposes a theoretical framework to model preferences over Lotto lotteries as compound lotteries. The first stage determines whether a prize is obtained, while the second stage determines the size of the prize. Second, the paper empirically analyses human behaviour when uncertainty can be described as a Lotto lottery. I find evidence for a mild degree of uncertainty aversion, i.e., subjects prefer lotteries with known prizes over lotteries with unknown prizes, everything else being equal. Further analysis shows that a combination of risk and ambiguity preferences can explain the subjects' uncertainty aversion.
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