Abstract
We test the effect of stake size on ambiguity attitudes. Compared to a baseline condition, we find subjects to be more ambiguity seeking for small-probability gains and large-probability losses under high stakes. They are also more ambiguity averse for large-probability gains and small-probability losses. We trace these effects back to stake effects on decisions under risk (known probabilities) and uncertainty (unknown probabilities). For risk, we replicate previous findings. For uncertainty, we find an increase in probabilistic insensitivity under high stakes that is driven by increased uncertainty aversion for large-probability gains and for small-probability losses.
Highlights
Some form of uncertainty is involved in most important decision-making processes, and uncertainty about the future may, be considered inherent to the human condition
We start by looking at stake effects on ambiguity attitudes, represented in Fig. 2, with the probability of winning represented on the x-axis and ambiguity aversion represented on the y-axis
We observe ambiguity aversion over the whole probability space, we cannot exclude the null hypothesis of an intercept equal to zero (z = 1.18, p = 0.24), indicating no ambiguity aversion for small probabilities
Summary
Some form of uncertainty is involved in most important decision-making processes, and uncertainty about the future may, be considered inherent to the human condition. Most empirical investigations have concentrated on the special case of risk, where objective probabilities are known While this case may be a good representation of some decision situations, such as roulette wheels or many medical decision problems (for which precise probabilities can be derived from a large number of past observations), the case of uncertainty proper, for which no objectively derivable probabilities are available, is likely to be much more important in praxis. The phenomenon by which people tend to prefer outcome generating processes characterized by known probabilities (risk) over outcome generating processes with vague or unknown probabilities (uncertainty) which are normatively equivalent under subjective expected utility theory (Savage 1954) is known as ambiguity aversion (Ellsberg 1961). In addition to the challenges it creates for subjective expected utility, ambiguity aversion has been deemed to be an important determinant of a variety of real-world decisions, including the home bias (Kilka and Weber 2000), reluctance to vaccinate (Ritov and Baron 1990), and the preference for established brands over new ones (Muthukrishnan et al 2009), to name but a few
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