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Causes of Ambiguity Aversion: Known versus Unknown Utilities

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 )

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Causes of Ambiguity Aversion: Known versus Unknown Utilities

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  1. Causes of Ambiguity Aversion: Known versus Unknown Utilities Stefan T. Trautmann and Ferdinand M. Vieider FUR 2006, Rome June 23rd, 2006

  2. 2 Ambiguity Aversion • 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)

  3. 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

  4. 4 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

  5. 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)

  6. > > (p=0.012) (p=0.002) Treatments and Results Same Price N=40 N=40 65% risky card 33% risky card >50% (p=0.04) <50% (p=0.019) Amb. 50c cheaper N=30 N=30 43% risky card 17% risky card Not significant <50% (p=0.0002)

  7. Data Analysis

  8. 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

  9. > > (p=0.039) (p=0.0008) Results Without Indifferences Same Price N=36 N=29 69% risky card 31% risky card >50% (p=0.014) <50%, p=0.031 Amb. 50c cheaper N=25 N=28 43% risky card 20% risky card Not significant <50% (p=0.002)

  10. Additional Results 10 • 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)

  11. 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!

  12. 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?

  13. End of slide show

  14. The lottery Mechanism 1) O 2) X 3) O 4) X 5) O 6) X 1) X 2) O 3) X 4) O 5) X 6) O 1) O 2) O 3) O 4) X 5) X 6) X 1) X 2) X 3) X 4) O 5) O 6) O 50/50 1) O 2) X 3) X 4) X 5) O 6) X 1) O 2) O 3) O 4) O 5) X 6) O 1) X 2) X 3) X 4) O 5) X 6) O 1) O 2) X 3) X 4) X 5) X 6) X ? 14 • 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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