Ambiguous Urn Research Articles

New experimental evidence on the relationship between home bias, ambiguity aversion and familiarity heuristics

We study portfolio diversification in an experimental decision task, where asset returns depend on a draw from an ambiguous urn. Holding other information constant and controlling for the level of ambiguity, we find that labeling assets as being familiar or from the homeland of subjects increases portfolio weights by around 25 %, respectively, although the return-generating process remains unaffected. Importantly, we only find these effects when the returns of assets are highly ambiguous. As a result, familiarity and home-land sympathy can lead to portfolios containing more assets with high ambiguity, i.e., bear greater downside risk. Our results disentangle the effects of familiarity and ambiguity as two prominent behavioral explanations of home bias and provide evidence for recent theoretical models on portfolio allocation under ambiguity.

Ambiguous information and dilation: An experiment

With standard models of updating under ambiguity, new information may increase the amount of relevant ambiguity: the set of beliefs may ‘dilate.’ We experimentally test one sharp case: agents bet on a risky urn and get information that is truthful or not based on the draw from an Ellsberg urn. With common models, the set of beliefs dilates, and the value of bets decreases for ambiguity-averse agents and increases for ambiguity-seeking ones. Instead, we find that the value of bets does not change for ambiguity-averse individuals, while it increases substantially for ambiguity-seeking ones. We also test bets on ambiguous urns, in which case we find sizable reactions to ambiguous information.

What is partial ambiguity?

AbstractThis paper reflects on the notion of partial ambiguity. Using a framework decomposing ambiguity into distinct layers of analysis, among which are risk and model uncertainty, and allowing for different attitudes toward these layers, I show that partial ambiguity may prove less desirable than full ambiguity, even under ambiguity aversion. This observation poses difficulties for interpreting the notion of partial ambiguity in relation to the partial information available to determine the potential compositions of an ambiguous urn. Two Ellsberg-style thought experiments are described to challenge the meaning of partial ambiguity further, and an alternative interpretation, based on a more ambiguous relation, is discussed.

Comparing ambiguous urns with different sizes

We investigate experimentally preferences between different ambiguous processes generated by two-color Ellsberg urns. By providing symmetric information on urns with different numbers of beads and keeping the information on the most optimistic, pessimistic, and equal probability of winning possibilities the same, we elicit subjects' preferences for the size of an ambiguous urn. Subjects prefer the bets from the ambiguous urns with more beads. We analyze the role of ambiguity aversion and ratio bias of subjects in this behavior. We study the restrictions that our findings impose on the existing ambiguity models.

Savage vs. Anscombe-Aumann: an experimental investigation of ambiguity frameworks

The Savage and the Anscombe–Aumann frameworks are the two most popular approaches used when modeling ambiguity. The former is more flexible, but the latter is often preferred for its simplicity. We conduct an experiment where subjects place bets on the joint outcome of an ambiguous urn and a fair coin. We document that more than a third of our subjects make choices that are incompatible with Anscombe–Aumann for any preferences, while the Savage framework is flexible enough to account for subjects’ behaviors.

Signaling probabilities in ambiguity: who reacts to vague news?

Ambiguity affects decisions of people who exhibit a distaste of and require a premium for dealing with it. Do ambiguity-neutral subjects completely disregard ambiguity and react to any vague news? Online vending platforms often attempt to affect buyer’s decisions by messages like “20 people are looking at this item right now” or “The average score based on 567 reviews is 7.9/10”. We augment the two-color Ellsberg experiment with similarly worded signals about the unknown probability of success. All decision-makers, including ambiguity-neutral, recognize and account for ambiguity; ambiguity-neutral subjects are less likely to respond to vague signals. The difference between decisions of ambiguity-neutral and non-neutral subjects vanishes for high precision signals; still less than 60% subjects choose the ambiguous urn, even for high communicated probabilities of success. We conjecture participants may discard information, if they see no contradiction between it and their prior beliefs, hence the latter are not updated. Higher confidence makes subjects more likely to discard the news, and empirically ambiguity-neutral subjects appear more confident than those ambiguity-averse.

Hedging, ambiguity, and the reversal of order axiom

We ran experiments that gave subjects a straight-forward and simple opportunity to hedge away ambiguity in an Ellsberg-style experiment. Subjects had to make bets on the combined outcomes of a fair coin and a draw from an ambiguous urn. By modifying the timing of the draw, coin flip, and decision, we are able to test the reversal-of-order axiom. Our main result is that the reversal-of-order axiom seems to hold. We also confirm low levels of ambiguity hedging despite the relative obviousness of the opportunity.

Size Matters Under Ambiguity

We investigate experimentally preferences between different ambiguous processes generated by two-color Ellsberg urns. By providing symmetric information on urns with different numbers of beads and keeping the information on the most optimistic, pessimistic, and equal probability of winning possibilities the same, we elicit subjects' preferences for the size of an ambiguous urn. Subjects prefer the bets from the ambiguous urns with more beads. We analyze the role of ambiguity aversion and ratio bias of subjects in this behavior. We study the restrictions that our findings impose on the existing ambiguity models.

Learning under compound risk vs. learning under ambiguity – an experiment

We design and conduct an economic experiment to investigate the learning process of agents under compound risk and under ambiguity. We gather data for subjects choosing between lotteries involving risky and ambiguous urns. Agents make decisions in conjunction with a sequence of random draws with replacement, allowing us to estimate the agents’ beliefs at different moments in time. For each type of urn, we estimate a behavioral model for which the standard Bayesian updating model is a particular case. Our findings suggest an important difference in updating behavior between risky and ambiguous environments. Specifically, even after controlling for the initial prior, we find that when learning under ambiguity, subjects significantly overweight the new signal, while when learning under compound risk, subjects are essentially Bayesian.

Decision-Making under Ambiguity Is Modulated by Visual Framing, but Not by Motor vs. Non-Motor Context. Experiments and an Information-Theoretic Ambiguity Model.

A number of recent studies have investigated differences in human choice behavior depending on task framing, especially comparing economic decision-making to choice behavior in equivalent sensorimotor tasks. Here we test whether decision-making under ambiguity exhibits effects of task framing in motor vs. non-motor context. In a first experiment, we designed an experience-based urn task with varying degrees of ambiguity and an equivalent motor task where subjects chose between hitting partially occluded targets. In a second experiment, we controlled for the different stimulus design in the two tasks by introducing an urn task with bar stimuli matching those in the motor task. We found ambiguity attitudes to be mainly influenced by stimulus design. In particular, we found that the same subjects tended to be ambiguity-preferring when choosing between ambiguous bar stimuli, but ambiguity-avoiding when choosing between ambiguous urn sample stimuli. In contrast, subjects’ choice pattern was not affected by changing from a target hitting task to a non-motor context when keeping the stimulus design unchanged. In both tasks subjects’ choice behavior was continuously modulated by the degree of ambiguity. We show that this modulation of behavior can be explained by an information-theoretic model of ambiguity that generalizes Bayes-optimal decision-making by combining Bayesian inference with robust decision-making under model uncertainty. Our results demonstrate the benefits of information-theoretic models of decision-making under varying degrees of ambiguity for a given context, but also demonstrate the sensitivity of ambiguity attitudes across contexts that theoretical models struggle to explain.

Learning Under Compound Risk vs. Learning Under Ambiguity - An Experiment

We design and conduct an economic experiment to investigate the learning process of agents under compound risk and under ambiguity. We gather data for subjects choosing between lotteries involving risky and ambiguous urns. Agents make decisions in conjunction with a sequence of random draws with replacement, allowing us to estimate the agents' beliefs at different moments in time. For each type of urn, we estimate a behavioral model for which the standard Bayesian updating model is a particular case. Our findings suggest an important difference in updating behavior between risky and ambiguous environments. Specifically, even after controlling for the initial prior, we and that when learning under ambiguity, subjects significantly overweight the new signal, while when learning under compound risk, subjects are essentially Bayesian.

Behavioral Determinants of Home Bias - Theory and Experiment

We study portfolio diversification in an experimental decision task, where asset returns depend on a draw from an ambiguous urn. Holding other information identical and controlling for the level of ambiguity, we find that labeling assets as being familiar or from the homeland of subjects increases portfolio weights by around 25%, respectively; although the return-generating process remains unaffected. Importantly, we only find these effects when the returns of assets are highly ambiguous. Our ambiguity robust mean-variance model accurately predicts benchmark portfolio weights of the experimental control group, where assets are not labeled: subjects allocate more wealth to assets with low ambiguity. For treatment group portfolios, which show a bias towards assets with a familiar or homeland label, the model does not hold. This misdiversification against the benchmark portfolio can be rationalized via the concept of source dependence of uncertainty attitudes.

Information Acquisition and Decisions Under Risk and Ambiguity

This paper experimentally investigates individual information acquisition and decisions in ambiguous situations in which the degree of ambiguity can endogenously and individually be decreased by the subjects. In particular, I analyze how risk aversion, ambiguity attitude and personality traits are related to an individual's information acquisition prior to a decision and to the decision itself based on this information. I focus on urn decisions and conduct treatments that consider the loss and gain domain separately and that vary the amount of available information and the probabilistic structure. I find that risk and ambiguity aversion affect the information acquisition but are less influential for the decisions between two ambiguous urns according to several heuristics. In contrast, personality traits and an individual's primary decision type turn out to have an impact on both information acquisition and decisions. I observe that under this study's presentation format the reflection effect is reversed for negative and positive payoffs in low probability treatments compared to corresponding results under a descriptive presentation format.

Why the Restricted Bayes/Hurwicz Criterion is Savagian: A Game-Theoretic Perspective of Ambiguity

Ellsberg (1961) introduced the Ellsberg urns experiments as evidence against Savage's theory of subjective expected utility. The restrictive Bayes/Hurwicz criterion (Ellsberg, 2001) is proposed to explain the phenomena of subjects shunning the ambiguous urns. Modeling the interaction between the experimenter and the subject as a game, we find sufficient and necessary conditions for the subject to modify beliefs with the reduced-form criterion. We postulate that diverse ambiguity attitudes result from different perceptions about the payoff structure. As a horse race gambler should adjust his belief after the gambling company publishes new odds, the subject can form different beliefs facing different choice problems. The revealed belief discrepancies can be a result of these modifications, and thus does not violate the Savage axioms about the preferences at the moment of each decision. The ambiguity game interpretation is supported by various neuroscientific and behavioral studies.

Short article: Is luck on my side? Optimism, pessimism, and ambiguity aversion

The influences of optimism and pessimism on ambiguity aversion were investigated in two tasks that manipulated the presence or absence of a potentially competitive experimenter. A total of 112 participants chose which option--ambiguous or known-risk--they preferred in the two slightly differing Ellsberg urns tasks. Optimism was measured using the Extended Life Orientation Test (ELOT). Highly optimistic people showed significantly less ambiguity aversion than less optimistic people when information was given that the number of balls was randomly determined. This pattern was present but less pronounced in the condition when the composition of the ambiguous urn could be interpreted as being influenced (rigged) by the experimenter. Pessimism was uninfluential. Perceptions of the situation, especially the degree of trust in the experimenter, were significantly influenced by the participants' optimism. People who do not have highly optimistic personalities tend to shy away from choosing ambiguous options. When ambiguity is clear, and trust issues are removed, people's optimistic outlook influences their degree of ambiguity aversion and thus their decisions.

Learning from ambiguous urns

We provide conditions under which ambiguity fades away in sampling with replacement from the same “ambiguous” urn.

Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry

U NLESS quality is apparent at the point of sale, the market must find ways to ensure the delivery of high-quality products; otherwise, producers have incentives to sell low-quality goods at high-quality prices, thereby assuring a degenerate equilibrium.1 Various solutions to this problem have been proposed, most revolving around bonding mechanisms.2 For bonds to work, however, consumers must react to the delivery of less-than-promised quality.3 In general, the faster consumers detect and react to delivery of low-quality products, the more efficient the market is in delivering high-quality products.4 Despite its prominence in the theoretical literature, direct evidence of consumer response to less-than-promised quality is rarely measured. This is a shortcoming presumably attributable to the difficulty of measuring both the difference between expected and actual product quality and