Content area
Full Text
J Risk Uncertainty (2008) 36:225243
DOI 10.1007/s11166-008-9038-9
Stefan T. Trautmann & Ferdinand M. Vieider &
Peter P. Wakker
Published online: 3 May 2008 # The Author(s) 2008
Abstract Ambiguity aversion appears to have subtle psychological causes. Curley, Yates, and Abrams found that the fear of negative evaluation by others (FNE) increases ambiguity aversion. This paper introduces a design in which preferences can be private information of individuals, so that FNE can be avoided entirely. Thus, we can completely control for FNE and other social factors, and can determine exactly to what extent ambiguity aversion is driven by such social factors. In our experiment ambiguity aversion, while appearing as commonly found in the presence of FNE, disappears entirely if FNE is eliminated. Implications are discussed.
Keywords Ambiguity aversion . Fear of negative evaluation . Home-bias
JEL classification C91, D81, Z13
In decision under uncertainty people have been found to prefer options involving clear probabilities (risk) to options involving vague probabilities (ambiguity), even if normative theory (Savage 1954) implies indifference. This phenomenon is called ambiguity aversion (Ellsberg 1961). Ambiguity aversion has been shown to be economically relevant and to persist in experimental market settings (Gilboa 2004; Sarin and Weber 1993) and among business owners and managers familiar with decisions under uncertainty (Chesson and Viscusi 2003). People are often willing to spend significant amounts of money to avoid ambiguous processes in favor of normatively equivalent risky processes (Becker and Brownson 1964; Chow and Sarin 2001; Keren and Gerritsen 1999).
Curley et al. (1986) found that increasing the number of people watching a decision enhanced ambiguity aversion, and enhanced it more than other factors that they manipulated. The relevance of evaluations by others is supported by Fox and
S. T. Trautmann : F. M. Vieider : P. P. Wakker (*)
Econometric Institute, Erasmus University, P.O. Box 1738, Rotterdam 3000, The Netherlands e-mail: [email protected]: http://www.few.eur.nl/few/people/wakker/
Causes of ambiguity aversion: Known versus unknown preferences
226 J Risk Uncertainty (2008) 36:225243
Tversky (1998), Fox and Weber (2002), and Heath and Tversky (1991), showing that ambiguity aversion increases with the perception that others are more competent and more knowledgeable. If people choose an ambiguous option and receive a bad outcome, then they fear criticisms by others. Such criticisms are easier to counter after...