Overcoming Ambiguity Aversion Through Experience

Abstract

Ambiguity is often characterized with unknown probability distributions (for potential outcomes), which people avoid while making decisions. Existing literature shows that ambiguity aversion often persists even when these probability distributions are explicitly described to decision makers. We test the hypothesis that exposure to these probability distributions via sampling experience, rather than description, will lead to a reduction in ambiguity aversion. We used the classic two‐colour Ellsberg task in which the participants were asked to choose to bet on either a risky bet (i.e. probabilities were known) or (versions of) an ambiguous bet (i.e. exact probabilities were unknown). Different probability distributions, each providing subtly different information about the underlying properties of the ambiguous bet, were either experienced through sampling or described to participants prior to choice. Overall, the results indicated that people demonstrated ambiguity‐neutral attitudes when the underlying probability distributions were experienced. In contrast, when described, attitudes toward ambiguity changed as a function of the type of probability distribution. Additional analyses confirmed that decision makers were less likely to be ambiguity‐averse when their individual experiences were positive during sampling trials (i.e. observing distributions with winning being more likely or more frequent). Copyright © 2014 John Wiley & Sons, Ltd.

The Effect of Experience on Context‐dependent Decisions

“…More broadly, our results highlight the need to study how classic choice phenomena generalize from decisions from description to situations where decision makers experience the available options (Fantino & Navarro, 2012). Other phenomena that have been put to such a test include ambiguity aversion (Dutt, Arló-Costa, Helzner, & Gonzalez, 2014;Ert & Trautmann, 2014;Güney & Newell, 2015), choicepricing preference reversal (Golan & Ert, 2015), and loss aversion (Erev et al, 2008;Lejarraga & Hertwig, 2017). A large replication study of 14 such phenomena has been recently conducted by Erev et al (2017).…”

Probability judgments under ambiguity and conflict

“…To my knowledge, no studies have involved disjoint sets of probabilities (e.g., “the probability of event E is either 0.2 or 0.5”). Indeed, the distinction between alternative discrete possible states and a continuous range of values for some quantity is largely absent from the psychological literature (but see Guney and Newell, 2014 ).…”

“…The extension of experiments using an experienced-information setup to studies of ambiguity is quite recent, with three publications thus far (Dutt et al, 2013 ; Ert and Trautmann, 2014 ; Guney and Newell, 2014 ). As yet, there are no studies investigating conflictive uncertainty in the experienced-information setting.…”

Project Net Present Value estimation under uncertainty

“…Uncertainty and risk were formally integrated in the economic theory by von Neumann and Morgenstern (1994). Supporters of the theory of economics state that uncertainty involves all the situations with non-deterministic parameters (known, unknown or incompletely known probability distribution, lack of information about possible scenarios), while risk is related to the possibility that some bad or other than predicted circumstances will happen (Aven 2016;Dominiak 2009;Dubois and Prade 2012;Fishburn 1984;Gaspars-Wieloch 2016b;Guney and Newell 2015;Ogryczak and Sliwinski 2009;Waters 2011). Nevertheless, as it was mentioned in the introduction, within the theory of economics, even if the probability is not known, some probability-like quantities can be often estimated and applied.…”