Causes of Ambiguity Aversion:Known versus Unknown Utilities
Stefan T. Trautmann and Ferdinand M. Vieider
FUR 2006, Rome
June 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)
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Ambiguity Aversion
Other-evaluation• People 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 chance’
• Curley, Yates and Abrams found that increasing other-evaluation increases ambiguity aversion
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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 subject’s 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
Prizes• The prizes are two movies on DVD:
•A DVD is obtained in any case: it is impossible to tell whether the subject ‘won’ or ‘lost’
•Preliminary tests on several movie pairings: strong preferences that cannot be predicted (ex post WTP: mean=€2.2, median=€1)
Treatments and Results
Known Preference Unknown Preference
Treatment 1 Treatment 2
Treatment 3 Treatment 4
Am
b. 5
0c
chea
per
Sam
e Pr
ice N=40
N=30N=30
N=40
65% risky card 33% risky card
43% risky card 17% risky card
>50% (p=0.04) <50% (p=0.019)
Not significant <50% (p=0.0002)
>(p=0.002)
>(p=0.012)
Data AnalysisProbit
Dependent variable: choicerisky
I II III IV V
unknown -0.8234** -0.8535** -0.8364** -0.8566** -0.8317**
price -0.5355* -0.5504* -0.3992 -0.4396 -0.5289*
male 0.0987 0.0042 0.1040 0.0649
age -0.0184 -0.0044 -0.0196 -0.0198
wtp (ex-post) 0.0642
university 0.2589
econ 0.1686
constant 0.3776* 0.7730 0.3597 0.6652 0.6951
Nobs 140 139 110 139 139
* significant at 5% level; ** significant at 1% level; two-sided
Marginal effects dF/dx for discrete change of dummy variable from 0 to 1 in regression I:
unknown -0.3091i.e. a ~thirty percent reduction in probability to take risky option when move to unknown preferences
price -0.2019i.e. a ~twenty percent reduction in probability to take risky option when introduce price difference
Data without Indifferences• Indifferent 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 Indifferences
Known Preference Unknown Preference
Treatment 1 Treatment 2
Treatment 3 Treatment 4
Am
b. 5
0c
chea
per
Sam
e Pr
ice N=36
N=25N=28
N=29
69% risky card 31% risky card
43% risky card 20% risky card
>50% (p=0.014) <50%, p=0.031
Not significant <50% (p=0.002)
>(p=0.0008)
>(p=0.039)
10Additional 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 explanations• Fear 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 results
• Self-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 won
• Future research: Is other-evaluation always present in the real-world?
End of slide show
14The lottery Mechanism• Cards instead of urns:
50/50
?
1) O2) X3) O4) X5) O6) X
1) X2) O3) X4) O5) X6) O
1) O2) O3) O4) X5) X6) X
1) X2) X3) X4) O5) O6) O
1) O2) X3) X4) X5) O6) X
1) O2) O3) O4) O5) X6) O
1) X2) X3) X4) O5) X6) O
1) O2) X3) X4) X5) X6) X
• 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
