Ambiguity Aversion

Ambiguity aversion is a person's rational attitude towards the indeterminacy of the probability that attaches to his future prospects, both favorable and unfavorable. An ambiguity-averse person increases the probability of the unfavorable prospect, which is what criminal defendants typically do when they face a jury trial. The prosecution is not ambiguity averse. Being a repeat player interested in the overall rate of convictions, it can depend upon any probability, however indeterminate it may be. The criminal process ...

This is a presentation of Thomas Bauer's thoughts on ambiguity and ambiguity(in)tolerance, written and contextualized for an anglophone philosophical context. It contains a couple of translated quotes and passages from Bauer's 2018 treatise 'Die Vereindeutigung der Welt'.

Contrary to traditional research into polysemy and ambiguity, we argue that polysemy is neither just a phenomenon of the dictionary, nor a purely cognitive phenomenon, but that its exploitation in everyday discourse has important communicational and pragmatic functions. Contrary to current work in psycholinguistics, we argue that ambiguity should not only be studied in vitro, as in priming studies and similar approaches using decontextualized samples, but that it should be analysed in vivo. Contrary to some older theories of implicature and some newer theories of relevance, we argue that people who engage in conversation do not always strive for rationality and relevance, that they do not always intend words to have one meaning and ‘disambiguate’ polysemous words automatically in context. The use and understanding of polysemous words may have costs in terms of processing time, but what Kittay (1987) calls ‘purposive ambiguity’ has important semantic, pragmatic and conversational benefits, such as reinforcing the semantic links between the nodes in a network of senses, strengthening the social bonds between those who exploit polysemy in conversation, and helping to negotiate crucial junctures between conversational turns.

To our knowledge, there are no extensive validation studies of existing ambiguity intolerance (AI) scales in the home countries of most of the participants in this study. Thus, we aimed to construct a scale for measuring overall AI that would be brief but also encompassing a wide range of behaviors that could be described as AI. Given that empirical research does not, overall, lend solid support to the AI construct multidimensionality, the scale was conceived as unidimensional. The study was conducted on 4 samples (5437 participants in total). Three samples were from the Serbian population and the fourth consisted of 4 separate subsamples that made up an international validation study of the SAIS-7 in four different languages (Serbian, Bulgarian, English, and Greek). The results of reliability, dimensionality, measurement invariance, convergent, external and incremental validity assessment suggest adequacy of the SAIS-7. The SAIS-7 is a solid brief measure of overall AI, and extensive analysis of different aspects of its functioning leads to a conclusion that this scale represents an economical measure with good content coverage that is recommendable for use.

This article analyzes the eects of public intervention and ambiguity on insurance demand. It first defines some theoretical predictions about the impact of these two parameters on insurance decision. It then presents the results of an experiment, conducted with 78 participants, 42 real private forest owners and 36 students from a French Forest Engineer School, designed to test the theoretical

*Level 6 (UG year 3) Module: DPE Dissertation. Grade: 68 (high 2:1).*
Equity home bias has been an enduring puzzle in behavioural finance. Prior studies have extensively focused on the structural reasonings for it, less research accounted for the behavioural explanations. This thesis focuses on one of the behavioural reasonings: ambiguity aversion, where the largest research gap lies through conducting an original conjoint survey experiment amongst undergraduate students at King’s College London. Four attributes of a given investment fund profile are presented in the survey design with random variations in attribute levels. Consistent with Dimmock et al. (2016)’s findings, this thesis found that the average probability of an investment fund being selected increases by 100% when the geographical proximity of the investment destination moves one level away from the fully diversified global portfolio, closer to home country (UK). Whilst this equity home bias is confirmed, ambiguity aversion only serves as a partial explanation to which. Other attributes namely industry and returns are also influential in determining investors’ choices, meanwhile, information asymmetry as a competing theory cannot be confidently ruled out.

The widely observed preference for lotteries involving precise rather than vague or ambiguous probabilities is
called ambiguity aversion. Ambiguity aversion cannot be predicted or explained by conventional expected
utility models. For the subjectively weighted linear utility (SWLU) model, we define both probability and payoff
premiums for ambiguity, and introduce a local ambiguity aversion function a(u) that is proportional to these
ambiguity premiums for small uncertainties. We show that one individual's ambiguity premiums are globaIk~
larger than another's if and only if his a(u) function is everywhere larger. Ambiguity aversion has been observed
to increase 1) when the mean probability of gain increases and 2) when the mean probability of loss decreases.
We show that such behavior is equivalent to a(u) increasing in both the gain and loss domains. Increasing
ambiguity aversion also explains the observed excess of sellers' over buyers' prices for insurance against an
ambiguous probability of loss.

In a recent article,Machina (Am Econ Rev forthcoming, 2008) suggested choice problems in the spirit of Ellsberg (Q J Econ 75:643–669, 1961), which challenge tail-separability, an implication of Choquet expected utility (CEU), to a similar
extent as theEllsberg paradox challenged the sure-thing principle implied by subjective expected utility (SEU). We have tested choice behavior for bets on one of Machina’s choice problems, the reflection example. Our results indicate that tail-separability is violated by a large majority of subjects (over 70% of the sample). These empirical findings complement the theoretical analysis of Machina (Am Econ Rev forthcoming,
2008) and, together, they confirm the need for new approaches in the analysis of ambiguity for decision making.

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina’s examples do not only falsify the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin and the smooth model of ambiguity aversion. Thus, Machina’s examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences achieves to accommodate the Machina paradoxes and what drives the results.

In this paper, we analyze the choice of primary prevention made by individuals who bear a risk of being in bad health and an additive risk (of complications) that occurs after a disease has been diagnosed. By considering a two argument utility (depending on wealth and health), we show that the presence of a well-known (no ambiguity) additive risk of complications induces more investment in primary prevention by a risk-averse agent only if her preferences does not display some cross prudence in wealth (u122 < 0). If there is some ambiguity on the e¤ective probability of complication, an increase in ambiguity aversion increases prevention if the agent is a correlation lover (u12 > 0). We also show that full (partial) insurance can be optimal even if insurance premia are loaded (fair). These results hold with and without prevention and the individuals attitudes toward correlation help explain the impact of ambiguity on the optimal individual decisions.

We axiomatize a model of decision under objective ambiguity or imprecise risk. The decision maker forms a subjective (non necessarily additive) belief about the likelihood of probability distributions and computes the average expected utility of a given act with respect to this second order ...

On the one hand, empirical evidence shows that in financial markets women seem to behave more risk averse than men. On the other hand there is experimental showing that in risky decisions controlled for opportunity sets only the context matters. In investment and insurance contexts with given probabilities women seem to expose approximately the same risk aversion as men. However,