Discriminating between models of ambiguity attitude

A qualitative test

Robin Cubitt, Gijs van de Kuilen, Sujoy Mukerji

Research output: Contribution to journalArticleScientificpeer-review

Abstract

During recent decades, many new models have emerged in pure and applied economic theory according to which agents’ choices may be sensitive to ambiguity in the uncertainty that faces them. The exchange between Epstein (2010) and Klibanoff et al. (2012) identified a notable behavioral issue that distinguishes sharply between two classes of models of ambiguity sensitivity that are importantly different. The two classes are exemplified by the α-maxmin expected utility (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 agent's preference for a randomized 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 that rely on specific models of ambiguity preference.
Original languageEnglish
Article numberjvz005
JournalJournal of the European Economic Association
DOIs
Publication statusE-pub ahead of print - Apr 2019

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Uncertainty
Hedge
Maxmin expected utility
Economic theory
Experiment design
Applied economics

Cite this

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abstract = "During recent decades, many new models have emerged in pure and applied economic theory according to which agents’ choices may be sensitive to ambiguity in the uncertainty that faces them. The exchange between Epstein (2010) and Klibanoff et al. (2012) identified a notable behavioral issue that distinguishes sharply between two classes of models of ambiguity sensitivity that are importantly different. The two classes are exemplified by the α-maxmin expected utility (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 agent's preference for a randomized 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 that rely on specific models of ambiguity preference.",
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Discriminating between models of ambiguity attitude : A qualitative test. / Cubitt, Robin; van de Kuilen, Gijs; Mukerji, Sujoy.

In: Journal of the European Economic Association, 04.2019.

Research output: Contribution to journalArticleScientificpeer-review

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