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Previous research has shown that individual decision making is often characterized by inertia—that is, a tendency for decision makers to choose options that maintain the status quo. In this study, I conduct a laboratory experiment to investigate two potential determinants of inertia in uncertain environments: (i) regret aversion and (ii) ambiguity-driven indecisiveness. I use a between-subjects design with varying conditions to identify the effects of these two mechanisms on choice behavior. In each condition, participants choose between two simple real gambles, one of which is the status quo option. The findings indicate that regret aversion and ambiguity-driven indecisiveness are equally important determinants of inertia, which in turn plays a major role in individual decision making. [ABSTRACT FROM AUTHOR]

We analyze the policy implications of aversion to Knightian uncertainty (ambiguity) about the possibility of tipping points. We demonstrate two channels through which uncertainty aversion affects optimal policy in the general setting. The first channel relates to the policy's effect on the probability of tipping, and the second channel to its differential impact in the pre- and post-tipping regimes. We then extend a recursive dynamic model of climate policy and tipping points to include uncertainty aversion. Numerically, aversion to Knightian uncertainty in the face of an ambiguous tipping point increases the optimal tax on carbon dioxide emissions, but only by a small amount. [ABSTRACT FROM AUTHOR]

Index insurance – in which payments are based on an index correlated with, but not identical to, individual losses – has been faced with an unexpectedly low uptake, despite its promise as a tool for poverty alleviation. This paper offers new insights into the behavioral impediments to the uptake of index insurance. We start from the observation that an index insurance contract appears to the farmer as a compound lottery, with uncertainty about individual production outcomes, as well as about the validity of the index as a reflection of individual losses. Adopting the smooth model of ambiguity aversion to this insurance problem, we show that in theory this compound lottery structure per se will dampen the demand for index insurance. Using framed field experiments with cotton farmers in Southern Mali, we elicited the coefficients of risk aversion and compound-risk aversion. The experimental results find that almost 60% of farmers are compound-risk averse, and that the distribution of compound-risk aversion is such that it would nearly cut in half the potential demand for the standard index insurance contracts. Our results highlight the importance of designing contracts with minimal basis risk under compound-risk aversion. Such a reduction in basis risk would not only enhance the value and productivity impacts of index insurance, but would also assure that the contracts are purchased and have their anticipated impacts. [ABSTRACT FROM AUTHOR]

We investigate the influence of skewness in asset fundamentals on asset prices under different states of uncertainty in double-auction markets. Three different types of assets are considered: risky assets, ambiguous assets and assets where the fundamental value distribution can be learned by repeated sampling of realizations. We show that market prices for skewed assets initially differ from those of non-skewed assets for risky as well as for ambiguous assets. Because of learning, the difference in market prices mostly disappears towards the end of trading. When fundamentals are “learned” by experience sampling, prices of all assets, irrespective of skewness, are very efficient from the beginning. Thus, when probabilities are not described but experienced, subjects are better able to estimate the fundamental value of an asset. [ABSTRACT FROM AUTHOR]