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We analyze the effect of strategic ambiguity and heterogeneous attitudes towards such ambiguity on optimal mitigation and adaptation. Pessimistic players tend to invest more in mitigation, while optimists favor adaptation. When adaptation is more expensive than mitigation, three types of equilibria can obtain depending on the level and distribution of ambiguity aversion: (i) a mitigation equilibrium, (i i) an adaptation equilibrium and (i i i) a mixed equilibrium with both adaptation and mitigation. The interaction between ambiguity attitudes and wealth distribution plays a crucial role for the aggregate environmental policy: a wealth transfer from pessimistic to optimistic agents increases total mitigation. A similar result applies to the choice of an optimal mitigation subsidy, which is shown to increase in optimism, but decrease following a transfer of income towards the more optimistic players. Finally, we show that under strategic ambiguity, the introduction of a non-binding standard can impact agents' beliefs about their opponents' behavior and as a result lower total equilibrium mitigation. Our results highlight the necessity to consider attitudes towards strategic ambiguity in the design of economic policies targeting climate change. They might also shed some light on the slow rate of convergence of environmental policies across countries. [ABSTRACT FROM AUTHOR]

Earlier work has shown that in a "costly attention" setup – where group members incur costs to pay attention to informative signals - smaller group sizes generally result in more accurate decisions, contrary to the Condorcet jury theorem. This result obtains whether group members deliberate or whether they vote secretly without deliberations. Moreover, when group sizes are small, barring deliberations leads to more accurate decision-making, while allowing deliberations is optimal in larger groups. In the current paper, I analyze a costly attention setup where some group members are ambiguity averse (ambiguity exists about the other group members' likelihood of paying attention) and find that groups larger than a threshold make the best decisions. Thus, this supports Condorcet's conclusion about the benefits of a larger group, but under very different conditions. Implications for whether to allow or bar deliberations in these large committees are more nuanced and depend on whether attentive members may be sure of making the correct judgment. The results yield policy implications regarding optimal committee size and on whether committees should allow or bar deliberations. [ABSTRACT FROM AUTHOR]

• Uncertainty about thresholds associated with tipping points often leads to considerable challenges in CPR management. • Data from an economic laboratory experiment is used to investigate the effects of threshold uncertainty and attitudes about uncertainty on CPR use. • Results suggest that threshold uncertainty increases CPR use, while attitudes about uncertainty are not significantly correlated with CPR use behavior. • Communication improves coordination, reduces the likelihood of resource collapse, and increases efficiency. Tipping points can occur in many complex environmental systems and often produce abrupt and irreversible change. Thresholds associated with tipping points are difficult to predict in many cases, leading to considerable challenges associated with the management of natural resources. We use a common pool resource (CPR) framework to investigate the impact of different types of threshold uncertainty on CPR use and the efficacy of coordination among group members. Participants in an economic laboratory experiment made decisions on the use of a CPR under three types of threshold treatments – a known threshold (certainty), an uncertain threshold with a known probability distribution of possible thresholds (risk), and an uncertain threshold with an unknown probability distribution (ambiguity). We also tested the effect of communication on coordination among participants in each treatment. We find that while threshold uncertainty (both risk and ambiguity) tends to increase CPR use, communication reduces the use of shared resources and increases social efficiency. Communication reduces the incidence of coordination failure in the presence of both types of threshold uncertainty. A takeaway from our results is that encouraging communication is likely to improve CPR management, while improving information about the probability of specific thresholds may only be useful if thresholds can be identified with certainty. [ABSTRACT FROM AUTHOR]

I develop a sequential trading model with ambiguity-averse market makers and provide a theoretical explanation to the historical coincidence of ambiguous events, asset illiquidity, and price variability. My model implies that the bid-ask spread of an asset contains an additive component of ambiguity premium. As a result, higher ambiguity generally leads to lower asset liquidity. More interestingly, asset prices are variable under particular conditions: specifically, only mixed-strategy equilibria exist, such that market makers probabilistically set multiple prices. Further analysis confirms that, compared with risk, ambiguity plays a unique role in explaining price variability. [ABSTRACT FROM AUTHOR]

We report the results of an experiment eliciting individuals' attitudes toward risk and model uncertainty. Using a joint elicitation procedure, we then precisely quantify the strength of individuals' attitude toward ambiguity in the context of the smooth model and characterize its main properties. Our results provide empirical evidence of decreasing absolute ambiguity aversion (DAAA) and constant relative ambiguity aversion (CRAA). These results shed new light on the way ambiguity attitudes may affect important decisions, such as the choice of health insurance policies or the optimal investment strategy in the face of climate change. [ABSTRACT FROM AUTHOR]

In a life-cycle model with a bequest motive, we study the impact of smooth ambiguity aversion to uncertain survival probabilities on the optimal demand for annuities. We implement a theory-driven laboratory experiment. First, a subject's ambiguity attitude is elicited in a simple experimental setting able to make the smooth ambiguity model operational. Then, in a two-period annuity-bequest decision problem, the subject's bequest in the second period is presented as a donation to a previously chosen charity, contingent to the subject being active after the first period. In line with the theoretical predictions, we find that ambiguity-averse (resp., loving) subjects invest less (resp., more) in annuities than ambiguity-neutral ones. Furthermore, subjects' contingent donation to the chosen charity increases in their investment in annuities only for sufficiently high levels of warm-glow altruism. [ABSTRACT FROM AUTHOR]

We study optimal insurance demand for a risk- and ambiguity-averse consumer under ambiguity about contract nonperformance. Ambiguity aversion lowers optimal insurance demand and the consumer's degree of ambiguity aversion is negatively associated with the optimal level of coverage. A more pessimistic belief and greater ambiguity may increase or decrease the optimal demand for insurance, and we determine sufficient conditions for a negative effect. We also discuss wealth effects and evaluate the robustness of our results by considering several alternative models of ambiguity aversion. Our findings show how ambiguity about contract nonperformance can undermine the functioning of insurance markets, making it a concern for regulators. Caution is required though because demand reactions are only imperfectly informative about the welfare effects of ambiguity about contract nonperformance. [ABSTRACT FROM AUTHOR]

• Subjects respond in a pessimistic/averse manner to the uncertainty surrounding climate change and climate change catastrophes, with 67% of subjects successfully purchasing the climate change insurance in the base treatment. • When subjects have more information about the growing frequency of such events, 79% successfully ensure themselves. • A lemons problem may arise with only high-risk individuals/regions subscribing towards climate change insurance and suggests that government intervention may be required to ensure market failures do not arise. • When the strategic uncertainty of coordination with another person is removed, 81% of subjects are successful in buying the insurance. • An indirect intervention in the form of a nudge was unsuccessful, with only 58% of subjects successfully buying the insurance. This paper attempts to study how individuals respond to the availability of an insurance that would safeguard their interests if a climate change catastrophe occurred. If such an insurance is available to them, do individuals insure themselves sufficiently? Further, the study investigates if information regarding the past occurrence of the catastrophic event leads to an increase in insurance subscriptions and/or the emergence of a lemons market. Finally, policy implications are investigated - Can an indirect intervention in the form of a "nudge" ensure a better outcome? [ABSTRACT FROM AUTHOR]

• We are one the first to study attitudes towards prudence in adolescence. • We explored adolescents' demographic profile in relation to decision-making under uncertainty. • Adolescents are ambiguity averse and prudent, despite being risk neutral on average. • In addition to studying gender and age, cognitive and non-cognitive abilities provide a more refined description of risk preferences, ambiguity preferences, and prudence. Given adolescents' propensity to engage in risky activities, experimentally elicited risk preferences have received much attention in this demographic group. In order to address the likelihood of engaging in potentially harmful activities, this study investigates various correlates of adolescents' risk preferences. Few studies have looked at other dimensions of decision-making under uncertainty in this important population, and here we attempted to close this gap by conducting a "lab in the field" experiment with adolescents. Our goals were twofold. First, we assessed both standard risk preferences during adolescence, as well as those of ambiguity and the higher order concept of prudence. Second, we examined the influence of individual characteristics of the decision-maker on attitudes towards risk, ambiguity, and prudence. In addition to gender and age, we focused on cognitive and non-cognitive abilities as potential moderators of interest Our results demonstrated that adolescents are risk neutral on average, however they are also typically ambiguity averse and display prudent behavior. Also, we found that various individual factors influenced adolescents' attitudes towards risk, ambiguity, and prudence. These specific characterizations can greatly aid in targeting policy in adolescence, and we conclude by suggesting several possibilities for these interventions. [ABSTRACT FROM AUTHOR]

We model and experimentally evaluate the trade-off between innovation and imitation commonly faced by firms. Innovation involves searching for a high payoff opportunity, but paying a cost in order to do so. Imitation involves avoiding that search cost and copying the most successful payoff opportunity uncovered thus far. We formulate a novel model of sequential innovation versus imitation decisions made by a group of n regret minimizing agents. We analyze the consequences of complete versus incomplete information about the distribution of payoffs from innovation on agents' decisions. We then study these predictions in a laboratory experiment where we find evidence in support of our theoretical predictions. [ABSTRACT FROM AUTHOR]

Nearly all life-cycle models adopt Yaari's (1965) assumption that individuals know the survival probabilities that they face. Given that an individual's exact survival probabilities are likely unknown, we explore the implications of relaxing this assumption. If there is no annuity market, then the welfare cost of survival ambiguity is large and regressive. Ambiguity neutral individuals would pay as much as 1% of total lifetime consumption for immediate resolution of ambiguity and the bottom income quintile is 4 times worse off than the top quintile. Alternatively, with the availability of competitive annuity contracts, survival ambiguity is welfare improving because it allows competitive insurance companies to pool risk across survival types. Even though Social Security and annuities share some properties, Social Security does not help to hedge survival ambiguity. [ABSTRACT FROM AUTHOR]

• Examines ambiguity aversion in the domain of criminal punishment. • Examines how individuals respond to shifts in enforcement regimes that are ambiguous vs uncertain. • Subjects respond sharply to changes in enforcement regimes in uncertain environments. • Subjects exhibit muted response to changes in enforcement regimes in ambiguous environments. • We find very limited support for subjects exhibiting preferences consistent with ambiguity aversion. There has been substantial prior field research on how the incidence of criminal behavior responds to changes in the probability of punishment. The results of this research are at best mixed in regards to its conformance to the predictions of standard expected utility theory. One possible cause for these mixed results is that punishment probabilities in the field are typically unknown making the choice environment one of ambiguity rather than uncertainty. The presence of this ambiguity could in part explain some of these conflicting results. As a step towards investigating this link, we conduct an experiment framed as being on tax compliance intended to try to understand how individuals respond to ambiguous punishment probabilities and in particular to how they respond to shifts in ambiguous versus known probabilities. We find that when probabilities are known and shift, the standard model works well to explain the response. When the probabilities are ambiguous and shift, the behavioral response is minimal. We also use these experiments as a means of testing whether ambiguity aversion might be present in sufficient degree to be exploitable in how enforcement procedures are advertised to increase their effectiveness at minimal cost. We find at best weak evidence in favor of ambiguity aversion and thus little support for the notion that enforcement regimes could take advantage of ambiguity aversion. [ABSTRACT FROM AUTHOR]

• Choice tasks under ambiguity while strategic motives of others matter. • The interactive Ellsberg task can be seen as a game or an individual choice problem. • Some subjects react to the strategic motives of an entity filling the Ellsberg urn. • Partially, behavior can be explained by Nash equilibrium, partially by ambiguity models. In his Ph.D.-thesis, Ellsberg formulated strong conditions under which his hypothetical tests of SEU theory have to take place – there should be no strategic interaction. Yet, in reality, situations with unknown probabilities often feature strategic interests of others, who may influence the unknown probabilities. Will decision makers see such situations as interactive or not? We construct experimental treatments where subjects make decisions under ambiguity, while also facing strategic motives of others. Payoffs form coordination or zero-sum games. At least a quarter of subjects view the situation as interactive; others behave in line with the predictions of ambiguity models. [ABSTRACT FROM AUTHOR]

Abstract A preference over menus is monotonic when every menu is at least as good as any of its subsets. We show that every utility representation for a monotonic preference is equal to the minmax value of a decision maker whose payoff depends on the option chosen from the menu and on the realization of a subjective state. This representation suggests a decision maker who faces uncertainty about her own future tastes and who exhibits an extreme form of pessimism with respect to this uncertainty. In the case of finitely many alternatives, we provide a characterization of monotonic preferences which relaxes the submodularity axiom of Kreps (1979). We characterize the minimal state space needed for our representation, and we show that the second-period choice behavior of our decision maker differs from the one implied by the costly contemplation model of Ergin (2003). [ABSTRACT FROM AUTHOR]

Rational expectations and behavioral-finance models are widely interpreted as representing two distinct conceptions of decision-making: rational and irrational, respectively. Using survey data, this paper presents econometric evidence that both fundamental factors and extrapolation drive participants’ expectations of stock returns, but that they do so in ways that vary over time. Although both the REH and behavioral-finance approaches offer relevant insights for understanding participants’ expectations, neither of these distinct model classes is consistent with time-series data. The paper’s findings also suggest that structural change gives rise to ambiguity about the correct quantitative model driving outcomes. This ambiguity, faced by economists and market participants alike, is the key to according both fundamental and behavioral factors a role in rational forecasting. [ABSTRACT FROM AUTHOR]

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]

How can behavioral science incorporate tools from machine learning (ML)? We propose that ML models can be used as upper bounds for the “explainable” variance in a given data set and thus serve as upper bounds for the potential power of a theory. We demonstrate this method in the domain of uncertainty. We ask over 600 individuals to make a total of 6000 choices with randomized parameters and compare standard economic models to ML models. In the domain of risk, a version of expected utility that allows for non-linear probability weighting (as in cumulative prospect theory) and individual-level parameters performs as well out-of-sample as ML techniques. By contrast, in the domain of ambiguity, two of the most widely studied models (a linear version of maximin preferences and second order expected utility) fail to compete with the ML methods. We open the “black boxes” of the ML methods and show that under risk we “rediscover” expected utility with probability weighting. However, in the case of ambiguity the form of ambiguity aversion implied by our ML models suggests that there is gain from theoretical work on a portable model of ambiguity aversion. Our results highlight ways in which behavioral scientists can incorporate ML techniques in their daily practice to gain genuinely new insights. [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]

We report data from the first incentivized artefactual field experiment conducted in China to understand whether Chinese migrants differ from non-migrants in terms of preferences regarding risk and uncertainty in various contexts. We find that, compared to non-migrants, migrants are significantly more likely to enter competitions when they expect competitive entries from others; however, migrants are not different from non-migrants in risk and ambiguity preferences where strategic uncertainty is absent. Our results suggest that migration may be driven more by a stronger belief in one’s chance of succeeding in an uncertain competitive environment than by differences risk attitudes related to state uncertainty. [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]

Although a number of theoretical studies explain empirical puzzles in finance with ambiguity aversion, it is not a given that individual ambiguity attitudes survive in markets. In fact, despite ample evidence of ambiguity aversion in individual decision making, most studies find no or only limited ambiguity aversion in experimental financial markets, even when they exclude arbitrage. We argue that ambiguity effects in markets depend on market feedback and on a sufficiently strong bias toward ambiguity among the participants. Accordingly, we find significant ambiguity effects in low-feedback call markets for assets that provoke high ambiguity aversion, but no ambiguity effects in high-feedback double auctions. [ABSTRACT FROM AUTHOR]

Highlights: [•] We compare ambiguity attitudes of groups and individuals in a laboratory experiment. [•] Groups are more likely to make ambiguity neutral decisions than individuals. [•] Individuals make more ambiguity neutral decisions after a group discussion. [•] The results might be driven by persuasive communication that takes place in groups. [Copyright &y& Elsevier]

Highlights: [•] We develop a model of similarity-based predictions with endogenous information. [•] Group-specific evaluations result from former interactions with group members. [•] The model can reproduce many of the most salient patterns about discrimination. [•] We show that affirmative action reduces negative stereotypes. [•] However, the quantitative effect of affirmative action is rather small. [ABSTRACT FROM AUTHOR]

Abstract: We focus on aspects of differential awareness that give rise to contractual disputes. Parties to a contract are boundedly rational as the state space available to them is coarser than the complete state space. Hence, they may disagree as to which state of the world has occurred, and therefore as to what actions are required by the contract. Such disagreement leads to disputes. We show that the agents may prefer simpler less ambiguous contracts when facing potential disputes. [Copyright &y& Elsevier]

Abstract: In this paper we argue that ambiguity, combined with social opinion formation, can be used as the foundation of a game-theoretic equilibrium concept that transcends the standard Nash equilibrium concept, applied to a model of the tragedy of the commons. Our approach sheds light on the international environmental crisis and the relevant ongoing international negotiations. We conclude that social opinion formation in most cases has a significant impact on equilibrium common property resource usage. [Copyright &y& Elsevier]

Abstract: Aumann [Aumann R., 1976. Agreeing to disagree. Annals of Statisitics 4, 1236–1239] derives his famous we cannot agree to disagree result under the assumption that people are expected utility () decision makers. Motivated by empirical evidence against EU theory, we study the possibility of agreeing to disagree within the framework of Choquet expected utility () theory which generalizes EU theory by allowing for ambiguous beliefs. As our first main contribution, we show that people may well agree to disagree if their Bayesian updating of ambiguous beliefs is psychologically biased in our sense. Remarkably, this finding holds regardless of whether people with identical priors apply the same psychologically biased Bayesian update rule or not. As our second main contribution, we develop a formal model of Bayesian learning under ambiguity. As a key feature of our approach the posterior subjective beliefs do, in general, not converge to “true” probabilities which is in line with psychological evidence against converging learning behavior. This finding thus formally establishes that CEU decision makers may even agree to disagree in the long-run despite the fact that they always received the same information. [Copyright &y& Elsevier]

Investigates Choquet expected utility (CEU), which is based on nonadditive probabilities. Ellsberg paradox behavior; Nonadditive probabilities (called capacities) for individual decision makers in an experiment on to study CEU.