Counting upsides and downsides in choices under ambiguity: a behavioral approach

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Ellsberg’s (2011) conjecture that, in certain decisions involving small (rare) probabilities, decision makers (DM) would reveal systematic ambiguity loving preferences, inspired us to propose a behavioral model, in which a DM counts the cons and pros of different foreseeable events. We focus—but not exclusively—on ambiguous situations where the ignorance of the underlying probabilities might enhance our behavior heuristics. The proposed model can explain, e.g. why people behave as ambiguity-averse for high probabilities but ambiguity-seeking for low ones, why framing via categorization affects choices, or why people in certain situations select dominant actions. We test and confirm some of these predictions in a controlled laboratory experiment.

Keywords: ambiguity, behavioral decision-making, Experiment, framing, heuristics.