Eichberger, Jürgen Oechssler, Jörg Schnedler, Wendelin
Year of Publication:
Discussion Paper Series, University of Heidelberg, Department of Economics 528
As illustrated by the famous Ellsberg paradox, many subjects prefer to bet on events with known rather than with unknown probabilities, i.e., they are ambiguity averse. In an experiment, we examine subjects’ choices when there is an additional source of ambiguity, namely, when they do not know how much money they can win. Using a standard independence assumption, we show that ambiguity averse subjects should continue to strictly prefer the urn with known probabilities. In contrast, our results show that many subjects no longer exhibit such a strict preference. This should have important ramifications for modeling ambiguity aversion.