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Journal of Risk and Uncertainty

, Volume 52, Issue 1, pp 47–64 | Cite as

Ellsberg paradox: Ambiguity and complexity aversions compared

  • Jaromír Kovářík
  • Dan Levin
  • Tao Wang
Article
  • 672 Downloads

Abstract

We present a simple model where preferences with complexity aversion, rather than ambiguity aversion, resolve the Ellsberg paradox. We test our theory using laboratory experiments where subjects choose among lotteries that “range” from a simple risky lottery, through risky but more complex lotteries, to one similar to Ellsberg’s ambiguity urn. Our model ranks lotteries according to their complexity and makes different—at times contrasting—predictions than most models of ambiguity in response to manipulations of prizes. The results support that complexity aversion preferences play an important and separate role from beliefs with ambiguity aversion in explaining behavior under uncertainty.

Keywords

Ambiguity Complexity Compound risk Ellsberg paradox Risk Uncertainty 

JEL Classification

C91 D01 D81 

Supplementary material

11166_2016_9232_MOESM1_ESM.pdf (263 kb)
(PDF 262 KB)

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Departamento Fundamentos Análisis Económico I & BridgeUniversity of the Basque CountryBilbaoSpain
  2. 2.CERGE-EICharles University in Prague and the Economics Institute of the Czech Academy of SciencesPragueCzech Republic
  3. 3.Department of EconomicsThe Ohio State UniversityColumbusUSA
  4. 4.Department of EconomicsSwarthmore CollegeSwarthmoreUSA

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