Ellsberg paradox: ambiguity and complexity aversions compared

0459196 - NHÚ 2017 RIV US eng J - Journal Article
Kovářík, Jaromír - Levin, D. - Wang, T.
Ellsberg paradox: ambiguity and complexity aversions compared.
Journal of Risk and Uncertainty. Roč. 52, č. 1 (2016), s. 47-64. ISSN 0895-5646. E-ISSN 1573-0476
R&D Projects: GA ČR(CZ) GA14-22044S
Institutional support: RVO:67985998
Keywords : ambiguity * complexity * compound risk
Subject RIV: AH - Economics
Impact factor: 1.298, year: 2016

We present a simple model where preferences with complexity aversion, rather than ambiguity aversion, resolve the Ellsberg paradox. We test our theory using laboratory experiments where subjects choose among lotteries that “range” from a simple risky lottery, through risky but more complex lotteries, to one similar to Ellsberg’s ambiguity urn. Our model ranks lotteries according to their complexity and makes different—at times contrasting—predictions than most models of ambiguity in response to manipulations of prizes. The results support that complexity aversion preferences play an important and separate role from beliefs with ambiguity aversion in explaining behavior under uncertainty.
Permanent Link: http://hdl.handle.net/11104/0259429