Seminari Theory-Experimental

Alex Brown

Texas A&M University


webinar – 14:30


By definition, uncertainty includes both risk and ambiguity. Yet, all previous experimental studies investigating uncertainty resolution have only elicited preferences over uncertainty resolution in the objective domain of risk. We provide the first experimental examination of uncertainty resolution with respect to subjective uncertainty, i.e., ambiguity, in addition to risk. We find that most subjects exhibit a preference for early resolution of both risk and ambiguity and these preferences are positively correlated. Ambiguity-averse subjects who prefer early resolution of risk are also likely to prefer early resolution of ambiguity. Also, being ambiguity-loving decreases the probability of preferring early resolution of ambiguity. The paper reviews six representative recursive utility models used in the macroeconomic and finance literature and only the generalized recursive smooth ambiguity model of Hayashi and Miao (2011) can plausibly explain these experimental findings. More generally, our results imply that examining uncertainty resolution only in the domain of risk produces a biased picture of an individual’s overall preferences on uncertainty resolution.

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