Unraveling Ambiguity Aversion

In a new article published on The Review of Economics and Statistics 1–32, our partners Ilke Aydogan and Loïc Berger, together with Valentina Bosetti, report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity.

They elicit individual preferences over different sources of uncertainty, entailing different degrees of complexity, from subjects with different sophistication levels. They 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.