Title

Ellsberg Paradox: Ambiguity And Complexity Aversions Compared

Document Type

Article

Publication Date

2-1-2016

Published In

Journal Of Risk And Uncertainty

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