Theory and Decision

, Volume 47, Issue 2, pp 157–184

Hopes and Fears: the Conflicting Effects of Risk Ambiguity

  • W. Kip Viscusi
  • Harrell Chesson
Article
  • 317 Downloads

Abstract

The Ellsberg Paradox documented the aversion to ambiguity in the probability of winning a prize. Using an original sample of 266 business owners and managers facing risks from climate change, this paper documents the presence of departures from rationality in both directions. Both ambiguity-seeking behavior and ambiguity-averse behavior are evident. People exhibit ‘fear’ effects of ambiguity for small probabilities of suffering a loss and ‘hope’ effects for large probabilities. Estimates of the crossover point from ambiguity aversion (fear) to ambiguity seeking (hope) place this value between 0.3 and 0.7 for the risk per decade lotteries considered, with empirical estimates indicating a crossover mean risk of about 0.5. Attitudes toward the degree of ambiguity also reverse at the crossover point.

Ambiguity Risk Ellsberg Paradox 

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Copyright information

© Kluwer Academic Publishers 1999

Authors and Affiliations

  • W. Kip Viscusi
    • 1
    • 2
  • Harrell Chesson
    • 1
    • 2
  1. 1.Harvard Law SchoolCambridge
  2. 2.Department of Health and Human ServicesCenters for Disease Control and PreventionAtlanta

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