Comparative Ignorance and the Ellsberg Paradox

We investigate the evaluation of known (where probability is known) and unknown (where probability is unknown) bets in comparative and non-comparative contexts. A series of experiments support the finding that ambiguity avoidance persists in both comparative and non-comparative conditions. The price difference between known and unknown bets is, however, larger in a comparative evaluation than in separate evaluation. Our results are consistent with Fox and Tversky's (1995) Comparative Ignorance Hypothesis, but we find that the strong result obtained by Fox and Tversky is more fragile and the complete disappearance of ambiguity aversion in non-comparative condition may not be as robust as Fox and Tversky had supposed.

[1]  F. Knight.  The economic nature of the firm: From Risk, Uncertainty, and Profit , 2009 .

[2]  Colin Camerer,et al.  Recent developments in modeling preferences: Uncertainty and ambiguity , 1992 .

[3]  Rakesh K. Sarin,et al.  Effects of ambiguity in market experiments , 1993 .

[4]  K. MacCrimmon,et al.  Utility Theory: Axioms Versus ‘Paradoxes’ , 1979 .

[5]  A. Tversky,et al.  Preference and belief: Ambiguity and competence in choice under uncertainty , 1991 .

[6]  A. Tversky,et al.  Who accepts Savage's axiom? , 1974 .

[7]  D. Ellsberg.  Decision, probability, and utility: Risk, ambiguity, and the Savage axioms , 1961 .

[8]  M. Degroot,et al.  Measuring utility by a single-response sequential method. , 1964, Behavioral science.

[9]  Craig R. Fox,et al.  Ambiguity Aversion and Comparative Ignorance , 1995 .

[10]  Lindsley G. Boiney.  The Effects of Skewed Probability on Decision Making under Ambiguity , 1993 .

[11]  Christopher K. Hsee,et al.  The Evaluability Hypothesis: An Explanation for Preference Reversals between Joint and Separate Evaluations of Alternatives , 1996 .

[12]  S. Becker,et al.  What Price Ambiguity? or the Role of Ambiguity in Decision-Making , 1964, Journal of Political Economy.

[13]  Rakesh K. Sarin,et al.  Modeling Ambiguity in Decisions Under Uncertainty , 1988 .

[14]  Shawn P. Curley,et al.  The center and range of the probability interval as factors affecting ambiguity preferences , 1985 .

[15]  Christopher K. Hsee,et al.  Preference Reversals between Joint and Separate Evaluations of Options: A Review and Theoretical Analysis , 1999 .

[16]  J. Keynes.  A Treatise on Probability. , 1923 .

[17]  W. Kip Viscusi,et al.  Hopes and Fears: the Conflicting Effects of Risk Ambiguity , 1999 .

[18]  Howard Kunreuther,et al.  Risk, ambiguity, and insurance , 1989 .