Is Ellsberg Behavior Evidence of Ambiguity Aversion?

Abstract

We design and implement lab experiments, as close as possible to the Ellsberg two-color urn experiment, to evaluate the positive and normative appeal of behavior arising from models of ambiguity-averse preferences. We report three main empirical findings: First, these preference models do not explain behavior any better than subjective expected utility. Second, subjects do not act on the basis of preferences alone. Third, additional clarification of the decision making environment pushes subjects' choices in the direction of ambiguity aversion models, regardless of whether or not this is also consistent with subjective expected utility.

Keywords: Knightian uncertainty, subjective expected utility, ambiguity aversion, lab experiment

JEL Classification: C91, D81