You Need to Recognize Ambiguity to Avoid it

Abstract

We study the influence of attention and comprehension on ambiguity attitudes. Subjects are presented with screening questions before choosing between two alternatives represented by payoff-matrices which are essentially equivalent to those in Ellsberg’s (1961) two-urn problem. The observed rate of ambiguity aversion for the standard two-urn problem is similar to what is reported in the literature regardless of the level of comprehension. When facing the essentially equivalent yet more complex matrix-based choice task, high-comprehension subjects continue to exhibit ambiguity aversion typical of the standard two-urn problem while low-comprehension subjects appear to behave randomly. We also classify subjects as “probability minded” or “ambiguity minded” based on whether they assign probabilities to draws from a deck of cards with unknown composition during the screening phase. High-comprehension subjects who are ambiguity-minded are far more likely to be ambiguity averse than those who are probability-minded. Significantly, subject “mindedness” appears to explain ambiguity attitudes an order of magnitude more than all other demographic characteristics combined. Contrary to intuition about subjects’ sophistication, ambiguity-minded high-comprehension subjects are younger, more educated, more analytic, and more reflective about their choices compared with their probability-minded counterparts.