Ambiguity aversion among student subjects: the role of probability interval and emotional parameters

Abstract

In the literature on decision-making under uncertainty, it has been shown that decision-makers tend to prefer taking gambles with known-risk probabilities (pure risk) over equivalent gambles with ambiguous probabilities. This article contributes to the ongoing discussion in the literature on cognitive and non-cognitive covariates of ambiguity aversion. Through a series of experiments, it finds that subjects are more ambiguity-averse to prospects with wide probability intervals than to an equivalent prospect with narrow intervals, and that subjects’ inherent trust, happiness and level of optimism affect the level of ambiguity aversion.

Keywords:

• Ambiguity aversion
• experiments
• optimism
• noncognitive factors

JEL Classification:

• C91
• D81

Notes

¹ Full details and instructions are available from the authors on request.

² A CE is simply the amount of money for which our subjects reveal themselves to be indifferent to the risky outcome with an expected value of $36.

³ The risk premium is the reduction of the revealed CE below the expected outcome (in all games here, $36), as a percentage of the expected outcome.

⁴ These ordinal measures of happiness were converted into a dummy variable as happier (1–3) and less happy (4–5). Likewise, the ordinal measures of trust were also converted into a dummy variable as more trusting (1–2) and less trusting (3–4). The results were quite similar when the original ordinal measures were used. Our measure of happiness captures only the current (transitory) state of their emotion, and a different approach might be needed to capture its long term dimension.

⁵ We were unable to use subject fixed effects as most of our variables of interest are treatment-invariant.

Additional information

Funding

We thank the College of Arts and Sciences at American University for research funds provided for our experiments.