Ambiguity Attitudes Research Articles

Robust [formula omitted]-maxmin representations

The class of α-maxmin representations of an agent’s preferences is meant to achieve a separation between the ambiguity he perceives and his attitude toward this perceived ambiguity. Yet the same preferences may admit a multiplicity of α-maxmin representations that contradict each other. We say that an α-maxmin representation is robust when no other α-maxmin representation exists for the same preferences. We obtain a full characterization of robustness for maxmin representation. In the case of general α-maxmin representations, we obtain sufficient conditions for both robustness and non-robustness. This contributes to better identification of the α-maxmin representations that admit a robust interpretation in terms of perceived ambiguity and ambiguity attitudes.

Decision‐making for others: Ambiguity attitudes

AbstractWe investigated decision‐making for others in ambiguous settings. In an online survey, subjects were asked to make decisions for themselves, and for other people. In Experiment 1, ambiguity was conveyed in numerical ranges. In Experiment 2, we used verbal probabilities expressions to convey uncertainty. Decisions encompass three degrees of ambiguity (low, moderate, and high). Consistent with previous literature findings, our results showed no significant differences between self‐other decision‐making on ambiguity. We build on the existing literature on ambiguity attitudes, emphasizing the use of verbal probability expressions to measure ambiguity, and provide novel evidence into decision‐making for others.

Quantitative vs. Qualitative Outcomes: A Longitudinal Study of Risk and Ambiguity in Monetary and Medical Decision-Making.

How do decision-makers choose between alternatives offering outcomes that are not easily quantifiable? Previous literature on decisions under uncertainty focused on alternatives with quantifiable outcomes, for example monetary lotteries. In such scenarios, decision-makers make decisions based on success chance, outcome magnitude, and individual preferences for uncertainty. It is not clear, however, how individuals construct subjective values when outcomes are not directly quantifiable. To explore how decision-makers choose when facing non-quantifiable outcomes, we focus here on medical decisions with qualitative outcomes. Specifically, we ask whether decision-makers exhibit the same attitudes towards two types of uncertainty - risk and ambiguity - across domains with quantitative and qualitative outcomes. To answer this question, we designed an online decision-making task where participants made binary choices between alternatives offering either guaranteed lower outcomes or potentially higher outcomes that are associated with some risk and ambiguity. The outcomes of choices were either different magnitudes of monetary gains or levels of improvement in a medical condition. We recruited 429 online participants and repeated the survey in two waves, which allowed us to compare the between-domain attitude consistency with within-domain consistency, over time. We found that risk and ambiguity attitudes were moderately correlated across domains. Over time, risk attitudes had slightly higher correlations compared to across domains, while in ambiguity over-time correlations were slightly weaker. These findings are consistent with the conceptualization of risk attitude as more trait-like, and ambiguity attitudes as more state-like. We discuss the implications and applicability of our novel modeling approach to broader contexts with non-quantifiable outcomes.

Ambiguity attitudes for real-world sources: field evidence from a large sample of investors

Empirical studies of ambiguity aversion mostly use artificial events such as Ellsberg urns to control for unknown probability beliefs. The present study measures ambiguity attitudes using real-world events in a large sample of investors. We elicit ambiguity aversion and perceived ambiguity for a familiar company stock, a local stock index, a foreign stock index, and Bitcoin. Measurement reliability is higher than for artificial sources in previous studies. Ambiguity aversion is highly correlated for different assets, while perceived ambiguity varies more between assets. Further, we show that ambiguity attitudes are related to actual investment choices.

320. A Preliminary Investigation of Risk and Ambiguity Attitudes in Adult Patients With Bulimia Nervosa

320. A Preliminary Investigation of Risk and Ambiguity Attitudes in Adult Patients With Bulimia Nervosa

Choice under uncertainty and cognitive load

Does exposure to cognitive load affect key properties of economic behavior? In this experiment, subjects face a series of simple binary decision tasks between prospects, testing for monotonicity in monetary payments, consistency with (first-order) stochastic dominance, reduction of compound lotteries, risk attitudes, and ambiguity attitudes. Cognitive load is manipulated via simultaneous memory tasks. Our data show treatment differences resulting from cognitive load for decision tasks with risky outcomes. However, cognitive load has no impact on monotonicity and ambiguity attitudes. Under a dual-process view of human decision-making, our findings suggest that ambiguity attitudes and preferences for “more certain money” are intuitive, not reasoned.

Are physicians rational under ambiguity?

AbstractDo physicians behave rationally when facing a new disease? This study assesses physicians’ ambiguity attitudes towards the future severity of the COVID-19 pandemic in its early stages and the financial market in the US using an incentive-compatible online experiment. Our findings indicate that physicians demonstrate significant deviations from expected utility, characterized by a modest degree of ambiguity aversion and pronounced levels of likelihood insensitivity. While physicians generally show less insensitivity to uncertainty compared to the general public, both groups exhibited similar levels of irrationality when dealing with the ambiguity surrounding the COVID-19 severity. These results underscore the necessity for debiasing strategies among medical professionals, especially in managing real-world uncertainties, with a specific focus on mitigating likelihood insensitivity.

Ambiguity attitudes toward natural and artificial sources in gain and loss domains

In this study, we compare ambiguity attitudes—ambiguity aversion and ambiguity-generated insensitivity (a-insensitivity)—toward natural and artificial sources of ambiguity in gain and loss domains with the participation of individuals with various attributes. In our experiment, we use precipitation during the rainy season as a natural source of ambiguity and the Ellsberg-type box as an artificial source. We find that people are more a-insensitive toward the natural source than the artificial source, even though the outcomes are identical. Additionally, people with low cognitive reflection ability are more a-insensitive than those with high cognitive reflection ability. Thus, people with low cognitive reflection ability have more difficulty in identifying likelihood under ambiguity and tend to view the likelihood of all uncertain events to be equal. Furthermore, we examine the relationships between ambiguity attitudes and real-world behaviors with regard to flood preparedness. In the group with high cognitive reflection ability, people with higher a-insensitivity are less likely to adopt flood preparedness behaviors in the gain domain of the natural source. However, we do not find any relationship between ambiguity attitudes and flood preparedness behaviors in the artificial source. Thus, applying ambiguity attitudes toward natural sources is worth considering when explaining real-world behaviors based on ambiguity attitudes.

Unraveling ESG Ambiguity, Price Reaction, and Trading Volume

We introduce an asset pricing model that integrates investors’ ESG preferences and their ambiguous attitudes towards firms’ ESG performance, influenced by inconsistent ESG ratings from diverse rating agencies. Our model, considering unregulated ESG reporting and variations in agency assessments, reveals significant dynamics in asset pricing. We discover that stronger belief in high ESG scores among investors increases asset holdings and prices, whereas increased perceived ESG ambiguity negatively impacts these metrics. Crucially, the model demonstrates that the ESG ambiguity attitudes parameter and the degree of perceived ESG ambiguity are inversely related to asset prices. Specifically, we find that heightened perceived ESG ambiguity and a higher ESG ambiguity attitudes parameter are associated with lower asset prices, reflecting in increased trading volumes and widened price differentials. This research offers vital insights into how investors’ preferences and perceptions about ESG influence asset pricing.

Absolute and Relative Ambiguity Attitudes

Absolute and Relative Ambiguity Attitudes

Ambiguity attitudes and demand for weather index insurance with and without a credit bundle: experimental evidence from Kenya

We investigate the impact of ambiguity attitudes on the willingness-to-pay (WTP) for index insurance among female smallholders in Kenya. We gauge incentive-compatible measures of ambiguity aversion and insensitivity in the domain of gains and losses, as well as loss aversion. Next, we setup a framed experiment to measure WTP for insurance with basis risk. For a random subsample we introduce an alternative ‘rebate’ insurance, comparable to an insurance purchased through a loan – repaid in good years and deducted from payout in bad ones – that is expectedly more palatable for the loss averse. We find that ambiguity aversion significantly increases WTP for the standalone insurance, while loss aversion reduces it as expected. The former result is seemingly at odds with previous evidence from the field, but is consistent with a setting in which insurance ambiguity engenders relatively less disutility compared to the vagaries of weather. We show that this apparent divergence is not caused by differences in the method used to estimate ambiguity aversion compared to existing field studies. Rather, we exploit exogenous variation in the familiarity with insurance within our sample to show that it is explained away by the role of experience with the novel technology—a previously underestimated mediator. Ambiguity aversion hinders adoption at early stages but increases when the insurance is better understood. The rebate scenario, instead, all but cancels the effect of loss aversion on WTP, but the increased contractual ambiguity results in significantly lower bids by the ambiguity averse. In the lab, the WTP for rebate-type insurance-credit bundles is not different from that of the actuarially equivalent standalone insurance, implying that evidence from the field on greater uptake for the former may be attributable to liquidity constraints and time discounting effects, rather than to behavioural traits.

Unpacking Overconfident Behavior When Betting on Oneself

Overconfident behavior, the excessive willingness to bet on one’s performance, may be driven by optimistic beliefs and/or ambiguity attitudes. Separating these factors is key for understanding and correcting overconfident behavior, as they call for different corrective actions. We present a method to do so, which we implement in two incentivized experiments. The first experiment shows the importance of ambiguity attitudes for overconfident behavior. Optimistic ambiguity attitudes (ambiguity seeking) counterbalanced the effect of pessimistic beliefs, leading to neither over- nor underconfident behavior. The second experiment applies our method in contexts where overconfident behavior is expected to vary: easy versus hard tasks. Our results showed that task difficulty affected both beliefs and ambiguity attitudes. However, although beliefs were more optimistic for relative performance (rank) and more pessimistic for absolute performance (score) on easy tasks compared with hard tasks, ambiguity attitudes were always more optimistic on easy tasks for both absolute and relative performance. Our findings show the subtle interplay between beliefs and ambiguity attitudes: they can reinforce or offset each other, depending on the context, increasing or lowering overconfident behavior. Yuval Rottenstreich, behavioral economics and decision analysis. Funding: This work was supported by HEC Paris research budget and Bocconi junior researchers’ grants. Supplemental Material: The data and online appendix are available at https://doi.org/10.1287/mnsc.2021.00165 .

Cost-(in)effective public good provision: an experimental exploration

This paper investigates the determinants of cost-(in)effective giving to public goods. We conduct a pre-registered experiment to elucidate how factors at the institutional and individual levels shape individual contributions and the cost-effectiveness of those contributions in a novel public good game. In particular, we examine the role of consequential uncertainty over the value of public good contributions (institutional level) as well as individual characteristics like risk and ambiguity attitudes, giving type, and demographics (individual level). We find cost-ineffective contributions in all institutions, but total contribution levels and the degree of cost-ineffectiveness are similar across institutions. Meanwhile, cost-effectiveness varies by giving type—which is a novel result that is consistent with hypotheses we generate from theory—but other individual characteristics have little influence on the cost-effectiveness of contributions. Our work has important positive and normative implications for charitable giving and public good provision in the real world, and it is particularly germane to emerging online crowdfunding and patronage platforms that confront users with a multitude of competing opportunities for giving.

Belief updating under ambiguity: A numerical simulation analysis

We compare Bayesian with the two non-Bayesian updating under ambiguity in its model specification and numerical implications. For an ambiguity averse (seeking) decision maker, we find that Gilboa and Schmeidler (GS) updating leads to a lower (higher) certainty equivalent (CE) than Dempster–Shafer (DS) updating and Bayesian updating, and the change of historical information has a bigger (smaller) impact on GS updating than on DS updating. In addition, the results shows that GS updating is more sensitive to the ambiguity attitude than DS updating. The application of numerical analysis in finance especially implies that the sensitivity of price to information depends on the ambiguity attitude of the market.

Testing negative value of information and ambiguity aversion

The standard Subjective Expected Utility model of decision-making implies that information can never have a negative value ex-ante. Many ambiguity theories have since questioned this property. We provide an experimental test of the connection between the value of information and ambiguity attitude. Our results show that the value of information can indeed be negative when new information renders hedging against ambiguity impossible. Moreover, the value of information is correlated with ambiguity aversion. This confirms the predictions from ambiguity theories and may have implications for decision-making in uncertain and dynamic environments. Neither complexity avoidance nor information with ambiguous reliability can reproduce the results.

Unraveling Ambiguity Aversion

Abstract We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty, entailing different degrees of complexity, from subjects with different sophistication levels. We show that (1) ambiguity aversion is robust to sophistication, but the strong relationship previously reported between attitudes toward ambiguity and compound risk is not. (2) Ellsberg ambiguity attitude can be partly explained by attitudes toward complexity for less sophisticated subjects only. Overall, regardless of the subject's sophistication level, the main driver of Ellsberg ambiguity attitude is a specific treatment of unknown probabilities.

Dynamic decision-making when ambiguity attitudes depend on exogenous events

Dynamic decision-making when ambiguity attitudes depend on exogenous events

Ambiguity aversion and the degree of ambiguity

We empirically show that sample information not only moderates prospects’ outcome ambiguity but also decision makers’ revealed aversion of them. Since most natural prospects permit at least some sample inference, accounting for their degree of ambiguity improves prediction of aversion. The special case of full ambiguity, as in Ellsberg-type designs, is typically averted—yet many decision makers systematically like low degrees of ambiguity while disliking higher degrees. Ambiguity attitudes might thus usefully be characterized by not only their sensitivity to degrees of ambiguity but also such ambiguity thresholds. Just as people like some risks but not others, they have ambiguity attitudes that depend on how much ambiguity there is. We thus show how attitudes towards a degree of ambiguity are systematic, enabling prediction across sources of ambiguity.

A Stackelberg reinsurance-investment game under α-maxmin mean-variance criterion and stochastic volatility

ABSTRACT This paper investigates a Stackelberg game between an insurer and a reinsurer under the α-maxmin mean-variance criterion. The insurer can purchase per-loss reinsurance from the reinsurer. With the insurer's feedback reinsurance strategy, the reinsurer optimizes the reinsurance premium in the Stackelberg game. The financial market consists of cash and stock with Heston's stochastic volatility. Both the insurer and reinsurer maximize their respective α-maxmin mean-variance preferences in the market. The criterion is time-inconsistent and we derive the equilibrium strategies by the extended Hamilton-Jacobi-Bellman equations. Similar to the non-robust case in [Li, D. & Young, V. R. (2022). Stackelberg differential game for reinsurance: mean-variance framework and random horizon. Insurance: Mathematics and Economics 102, 42–55.], excess-of-loss reinsurance is the optimal form of reinsurance strategy for the insurer. The equilibrium investment strategy is determined by a system of Riccati differential equations. Besides, the equations determining the equilibrium reinsurance strategy and reinsurance premium rate are given semi-explicitly, which is simplified to an algebraic equation in a specific example. Numerical examples illustrate that the game between the insurer and reinsurer makes the insurance more radical when the agents become more ambiguity averse or risk averse. Furthermore, the level of ambiguity, ambiguity attitude, and risk attitude of the insurer (reinsurer) have similar effects on the equilibrium reinsurance strategy, reinsurance premium, and investment strategy.

To mitigate or to adapt: How to deal with optimism, pessimism and strategic ambiguity?

We analyze the effect of strategic ambiguity and heterogeneous attitudes towards such ambiguity on optimal mitigation and adaptation. Pessimistic players tend to invest more in mitigation, while optimists favor adaptation. When adaptation is more expensive than mitigation, three types of equilibria can obtain depending on the level and distribution of ambiguity aversion: (i) a mitigation equilibrium, (ii) an adaptation equilibrium and (iii) a mixed equilibrium with both adaptation and mitigation. The interaction between ambiguity attitudes and wealth distribution plays a crucial role for the aggregate environmental policy: a wealth transfer from pessimistic to optimistic agents increases total mitigation. A similar result applies to the choice of an optimal mitigation subsidy, which is shown to increase in optimism, but decrease following a transfer of income towards the more optimistic players. Finally, we show that under strategic ambiguity, the introduction of a non-binding standard can impact agents’ beliefs about their opponents’ behavior and as a result lower total equilibrium mitigation. Our results highlight the necessity to consider attitudes towards strategic ambiguity in the design of economic policies targeting climate change. They might also shed some light on the slow rate of convergence of environmental policies across countries.