Theory and Decision

, 66:199 | Cite as

Recursive expected utility and the separation of attitudes towards risk and ambiguity: an experimental study

  • Sujoy Chakravarty
  • Jaideep Roy


We use the multiple price list method and a recursive expected utility theory of smooth ambiguity to separate out attitude towards risk from that towards ambiguity. Based on this separation, we investigate if there are differences in agent behaviour under uncertainty over gain amounts vis-a-vis uncertainty over loss amounts. On an aggregate level, we find that (i) subjects are risk averse over gains and risk seeking over losses, displaying a “reflection effect” and (ii) they are ambiguity neutral over gains and are mildly ambiguity seeking over losses. Further analysis shows that on an individual level, and with respect to both risky and ambiguous prospects, there is limited incidence of a reflection effect where subjects are risk/ambiguity averse (seeking) in gains and seeking (averse) in losses, though this incidence is higher for ambiguous prospects. A very high proportion of such cases of reflection exhibit risk (ambiguity) aversion in gains and risk (ambiguity) seeking in losses, with the reverse effect being significantly present in the case of risk but almost absent in case of ambiguity. Our results suggest that reflection across gains and losses is not a stable individual characteristic, but depends upon whether the form of uncertainty is precise or ambiguous, since we rarely find an individual who exhibits reflection in both risky and ambiguous prospects. We also find that correlations between attitudes towards risk and ambiguity were domain dependent.


Recursive expected utility Risk Ambiguity 

JEL Classifications

C9 C44 C91 


  1. Andersen, S., Harrison, G. W., Lau, M. I., & Rutstrom, E. E. (2005). Elicitation using multiple price list formats. Experimental Economics (forthcoming).Google Scholar
  2. Bernasconi M., Loomes G. (1992) Failures of the reduction principle in an Ellsberg-type problem. Theory and Decision 32: 77–100CrossRefGoogle Scholar
  3. Budescu D.V., Kahn K.M., Kramer K.M., Johnson T.R. (2002) Modeling certainty equivalents for imprecise gambles. Organizational Behavior and Human Decision Processes 88: 748–768CrossRefGoogle Scholar
  4. Camerer C., Weber M. (1992) Recent developments in modelling preferences: Uncertainty and ambiguity. Journal of Risk and Uncertainty 4: 325–370CrossRefGoogle Scholar
  5. Chakravarty, S., Harrison, G. W., Haruvy, E., & Rutstrm, E. E. (2005). Are you risk averse over other people’s money? Working Paper, University of Central Florida, Dept. of Economics, pp. 5–26.Google Scholar
  6. Cooper, D., & Fang, H. (2006). Understanding overbidding in second price auctions: An experimental study. Cowles Foundation Discussion Paper No. 1557.Google Scholar
  7. Cohen M., Jaffray J.-Y., Said T. (1987) Experimental comparisons of individual behaviour under risk and under uncertainty for gains and for losses. Organizational Behavior and Human Decision Processes 39: 1–22CrossRefGoogle Scholar
  8. Curley S.P., Yates F. (1985) The center and range of the probability interval as factors affecting ambiguity preference. Organizational Behavior and Human Decision Processes 36: 272–287CrossRefGoogle Scholar
  9. Curley S.P., Yates F. (1989) An empirical evaluation of descriptive models of ambiguity reactions in choice situations. Journal of Mathematical Psychology 33: 397–427CrossRefGoogle Scholar
  10. Di Mauro C., Maffioletti A. (2004) Attitudes to risk and attitudes to uncertainty: Experimental evidence. Applied Economics 36: 357–372CrossRefGoogle Scholar
  11. Du N., Budescu D.V. (2005) The effects of imprecise probabilities and outcomes in evaluating investment options. Management Science 51(12): 1791–1803CrossRefGoogle Scholar
  12. Einhorn, H. J., & Hogarth, R. M. (1986). Decision making under ambiguity. Journal of Business, 59(4) (Part 2), 225–250.Google Scholar
  13. Eisenberger R., Weber M. (1995) Willingness-to-pay and willingness-to-accept for risky and ambiguous lotteries. Journal of Risk and Uncertainty 10: 223–233CrossRefGoogle Scholar
  14. Ellsberg D. (1961) Risk, ambiguity and the savage axioms. Quarterly Journal of Economics 75: 643–669CrossRefGoogle Scholar
  15. Halevy Y. (2007) Ellsberg revisited: An experimental study. Econometrica 75(2): 503–536CrossRefGoogle Scholar
  16. Harrison G.W., Johnson E., McInnes M.M., Rutstrom E.E. (2005) Risk aversion and incentive effects: Comment. American Economic Review 95(3): 897–901CrossRefGoogle Scholar
  17. Harrison, G. W., & Rutstrom, E. E. (2005). Representative agents in lottery choice experiments: One wedding and a decent funeral. Working Paper, University of Central Florida.Google Scholar
  18. Heston, A., Summers, R., & Aten, B. (2002). Penn World Table Version 6.1, Center for International Comparisons, University of Pennsylvania (CICUP), October.Google Scholar
  19. Hogarth R.M., Einhorn H.J. (1990) Venture theory: A model of decision weights. Management Science 36(7): 780–803CrossRefGoogle Scholar
  20. Holt C.A., Laury S.K. (2002) Risk aversion and incentive effects. American Economic Review 92(5): 1644–1655CrossRefGoogle Scholar
  21. Kagel J., Levin D. (1993) Independent private value auctions: Bidder behaviour in first, second and third price auctions with varying number of bidders. Economic Journal 103: 868–879CrossRefGoogle Scholar
  22. Kagel J., Levin D., Harstad R. (1987) Information impact and allocation rules in auctions with affiliated private values: A laboratory study. Econometrica 55(6): 1275–1304CrossRefGoogle Scholar
  23. Kahn B.E., Sarin R.K. (1988) Modelling ambiguity in decisions under uncertainty. Journal of Consumer Research 15: 262–272CrossRefGoogle Scholar
  24. Kahneman D., Tversky A. (1979) Prospect theory: An analysis of decisions under risk. Econometrica 47: 313–327CrossRefGoogle Scholar
  25. Klibanoff P., Marinacci M., Mukerji S. (2005) A smooth model of decision making under ambiguity. Econometrica 73(6): 1849–1892CrossRefGoogle Scholar
  26. Lauriola M., Levin I.P. (2001) Relating individual differences in attitude toward ambiguity and risky choices. Journal of Behavioral Decision Making 14(2): 107–122CrossRefGoogle Scholar
  27. Laury, S., & Holt, C. A. (2005). Further reflections on Prospect Theory. Andrew Young School of Policy Studies Research Paper Series No. 06–11.Google Scholar
  28. MacCrimmon, K. R., & Larsson, S. (1979). Utility theory: Axioms versus paradoxes. In M. Allais & O. Hagen (Eds.), The expected utility hypothesis and the Allais Paradox (pp. 333–409). Dordrecht, Holland: D. Reidel.Google Scholar
  29. Schneweiss H. (1973) The Ellsberg Paradox from the point of view of Game Theory. Inference and Decision 1: 65–78Google Scholar
  30. Tversky A., Kahneman D. (1992) Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5(4): 297–323CrossRefGoogle Scholar
  31. Viscusi W.K., Chesson H. (1999) Hopes and Fears: The conflicting effects of risk ambiguity. Theory and Decision 47: 153–178CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  1. 1.Department of Humanities and Social SciencesIndian Institute of TechnologyHauz Khas, New DelhiIndia
  2. 2.Department of Economics, School of Social SciencesBrunel UniversityUxbridgeUK

Personalised recommendations