causes of ambiguity aversion: known versus unknown utilities

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Causes of Ambiguity Aversion: Known versus Unknown Utilities. Stefan T. Trautmann and Ferdinand M. Vieider. FUR 2006, Rome June 23 rd , 2006. 2. Ambiguity Aversion. Absence of probabilistic info about outcome- generating process (Frisch and Baron, 1988 ) - PowerPoint PPT Presentation

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  • Causes of Ambiguity Aversion:Known versus Unknown UtilitiesStefan T. Trautmann and Ferdinand M. VieiderFUR 2006, RomeJune 23rd, 2006

  • Absence of probabilistic info about outcome- generating process (Frisch and Baron, 1988) People choose the process about which they know more relative to other processes (comparative ignorance, Fox and Tversky, 1995)People avoid processes of which they think others have better knowledge (competence effect, Heath and Tversky 1991) Hypothesis: both phenomena caused by fear to be evaluated negatively by others (other-evaluation, Curley Yates and Abrams, 1986)*Ambiguity Aversion

  • Other-evaluationPeople fear to be evaluated negatively by others if a loosing outcome should obtain from a choice perceived as uninformed (Baron and Hershey 1988)Risky process rather than ambiguous one: outcome can be blamed on pure chanceCurley, Yates and Abrams found that increasing other-evaluation increases ambiguity aversion

  • *Purpose and Setup We want to further investigate the causes of ambiguity aversion, and in particular other-evaluation; is it a necessary condition? We make the subjects utilities her private information the experimenter cannot tell whether the subject lost or won (informational advantage for the subject) Lottery mechanism that reduces predictability for the experimenter and excludes manipulation

  • PrizesThe prizes are two movies on DVD:A DVD is obtained in any case: it is impossible to tell whether the subject won or lostPreliminary tests on several movie pairings: strong preferences that cannot be predicted (ex post WTP: mean=2.2, median=1)

  • Treatments and Results

    Amb. 50c cheaperSame PriceN=40N=30N=30N=4065% risky card33% risky card43% risky card17% risky card>50% (p=0.04)

  • Data Analysis

  • Data without IndifferencesIndifferent subjects should be eliminated since there is no winning or losing outcome involved (best outcome w.p.1)Mean WTP is now 2.6, median 2 (bigger utility difference)Upper bound for indifferences (either declared indifference or WTP=0)No qualitative difference if a different criterion is used

  • Results Without IndifferencesAmb. 50c cheaperSame PriceN=36N=25N=28N=2969% risky card31% risky card43% risky card20% risky card>50% (p=0.014)
  • *Additional Results Unknown preference condition: subjects who have chosen the ambiguous card generally declare to have won their preferred DVD (p=0.025, one-sided t-test) Subjects who have chosen the risky card on the other hand do not declare to have obtained their preferred DVD Subjects who had chosen the risky card in the unknown preference condition were significantly more likely to declare that the experimenter could have guessed their preference (p=0.012)

  • Possible alternative explanationsFear of Manipulation? However: subjects always win a DVD, so no gain from manipulation for the experimenter; subjects choose how to attach signs.Writing down the title of the DVD induces stronger preference? However: WTP is not different between known and unknown condition, hence no difference in strength of preference; inclusion of WTP does not affect probit resultsSelf-evaluation? However: not found by Curley Yates Abrams (1986); same in known or unknown preference treatment!

  • Conclusions

    Other-evaluation: necessary for ambiguity aversion!? Embarrassment for losses with ambiguous card some people who lose with an ambiguous choice declare that they have actually wonFuture research: Is other-evaluation always present in the real-world?

  • End of slide show

  • *The lottery Mechanism Cards instead of urns: Two symbols, X or O are assigned to the DVDs Subject chooses a stack and draws a card Die is rolled to determine the winning symbol and thus the prize

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