Ambiguity aversion

Ambiguity aversion can be used to explain incomplete contracts, volatility in stock markets, and selective abstention in elections (Ghirardato & Marinacci, 2001).

The many possible explanations include different choice mechanisms, behavioral biases and differential treatment of compound lotteries; this in turn explains the lack of a widespread measure of ambiguity aversion.

In their 1989 paper, Gilboa and Schmeidler[1] propose an axiomatic representation of preferences that rationalizes ambiguity aversion.

Its axiomatization allows for non-additive probabilities and the expected utility of an act is defined using a Choquet integral.

In Halevy (2007)[3] the experimental results show that ambiguity aversion is related to violations of the Reduction of Compound Lotteries axiom (ROCL).

[5] During the experiment, the Battle of Sexes games were alternated with decision problems based on the 3-ball Ellsberg urn.

In these rounds, subjects were presented with an urn containing 90 balls, of which 30 were Red, and the remainder an unknown proportion of Blue or Yellow, and asked to pick a colour to bet on.

One surprising feature of the results was that the links between choices in the single person decision and those in the games was not strong.

Subjects appeared to perceive a greater level of ambiguity in a two-person coordination game, than a single person decision problem.

Given the salience of ambiguity in economic and financial research, it is natural to wonder about its relation with learning and its persistence over time.