Elicitation of Preferences under Ambiguity

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JournalJournal of Risk and Uncertainty
DateAccepted/In press - 9 Dec 2016
DatePublished (current) - 12 Jun 2017
Issue number2
Volume54
Pages (from-to)87-102
Original languageEnglish

Abstract

This paper is about behaviour under ambiguity ‒ that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a ‘state of the world’ with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α­-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α­-MEU.

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© The Author(s) 2017

    Research areas

  • allocations, ambiguity, preferences under ambiguity

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