No. 831: Discriminating between Models of Ambiguity Attitude: A Qualitative Test
August 18, 2017
During recent decades, many new models have emerged in pure and applied economic theory according between Epstein (2010) and Klibanoff et al. (2012) identified a notable behavioural issue that distinguishes sharply between two classes of models of ambiguity sensitivity that are importantly different. The two classes are exemplified by the -MEU model and the smooth ambiguity model, respectively; and the issue is whether or not a desire to hedge independently resolving ambiguities contributes to an ambiguity averse preference for a randomised act. Building on this insight, we implement an experiment whose design provides a qualitative test that discriminates between the two classes of models. Among subjects identified as ambiguity sensitive, we find greater support for the class exemplified by the smooth ambiguity model; the relative support is stronger among subjects identified as ambiguity averse. This finding has implications for applications which rely on specific models of ambiguity preference.
J.E.L classification codes: C91, D01, D03, D81, G02
Keywords:Ambiguity sensitivity; ambiguity attitude; testing models of ambiguity sensitive preference