Experimental & Behavioural Economics Seminar - Sean Crockett (Zicklin School of Business)
Room 315, Level 3, FBE Building, 111 Barry Street, CarltonMap
Title: Ellsberg's Hidden Paradox
Abstract: Ellsberg (1961) proposes two alternative frames to elicit individuals’ preferences for ambiguity. Through an experiment, we ﬁnd that Ellsberg’s three-color one-urn frame induces very diﬀerent revealed preferences than the two-color two-urn frame. In both frames, we document ambiguity aversion for likely gains and (weak) ambiguity seeking for unlikely gains. The intensity of both these attitudes, however, is strongly curbed in the three-color frame. These ﬁndings may imply that perceived probabilities are biased toward uniformly distributed states and consequences, introducing a tension between them in the three-color frame. Surprisingly, we ﬁnd that subjects who are simply asked to ﬁll urns with colored bingo chips for a ﬁxed payment also reveal a similar uniformity bias. We argue that both urn ﬁllers and incentivized decision makers are inﬂuenced by similar perceptually salient features of probability intervals. Our ﬁndings have important implications for decision theory, and, by extension, for economic, ﬁnancial, political, and medical decisions.