You Need to Recognize Ambiguity to Avoid It

Authors

  • Chew Soo Hong,

    Corresponding author
    1. Department of Economics and Department of Finance, National University of Singapore, Singapore
    2. Department of Economics, Hong Kong University of Science and Technology
    • Corresponding author

      Chew Soo Hong

      Department of Economics and Department of Finance, National University of Singapore, AS2 #06-02, 1 Arts Link, Singapore 117570; Department of Economics, Hong Kong University of Science and Technology. Email:

      chew.soohong@gmail.com

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  • Mark Ratchford,

    1. Owen Graduate School of Management, Vanderbilt University, Nashville, TN
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  • Jacob S. Sagi

    1. Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, 4412 McColl Building, Chapel Hill, NC
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  • This article has been accepted for publication and undergone full peer review but has not been through the copyediting, typesetting, pagination and proofreading process, which may lead to differences between this version and the Version of Record. Please cite this article as doi: 10.1111/ecoj.12541

Abstract

After screening for attentiveness and comprehension, we present subjects with Ellsberg's (1961) two-urn problem using essentially equivalent but representationally complex matrices. Highcomprehension subjects exhibit rates of ambiguity aversion typical of the standard two-urn problem, while low-comprehension subjects appear to randomize. In screening, we classify subjects as “probability-minded” or “ambiguity-minded”, depending on whether they assign probabilities to draws from a card deck of unknown composition. Among high-comprehension subjects, “mindedness” explains twenty times more variation in ambiguity attitudes than all other demographic characteristics combined. Compared with their “probability-minded” counterparts, “ambiguity-minded” subjects are younger and more educated, analytic, and reflective about their choices.

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