Preference and belief: Ambiguity and competence in choice under uncertainty

Abstract

We investigate the relation between judgments of probability and preferences between bets. A series of experiments provides support for the competence hypothesis that people prefer betting on their own judgment over an equiprobable chance event when they consider themselves knowledgeable, but not otherwise. They even pay a significant premium to bet on their judgments. These data connot be explained by aversion to ambiguity, because judgmental probabilities are more ambiguous than chance events. We interpret the results in terms of the attribution of credit and blame. The possibility of inferring beliefs from preferences is questioned.1

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This work was supported by Grant 89-0064 from The Air Force Office of Scientific Research to Stanford University. Funding for experiment 1 was provided by SES 8420240 to Ray Battalio. We have benefited from discussions with Max Bazerman, Daniel Ellsberg, Richard Gonzales, Robin Hogarth, Linda Ginzel, Daniel Kahneman, and Eldar Shafir.

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Heath, C., Tversky, A. Preference and belief: Ambiguity and competence in choice under uncertainty. J Risk Uncertainty 4, 5–28 (1991). https://doi.org/10.1007/BF00057884

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Key words

  • ambiguity
  • uncertainty
  • preferences