This paper is about behaviour under ambiguity ‒ that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a ‘state of the world’ with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α-MEU.
Keywords: allocations, ambiguity, preferences under ambiguity
JEL codes: C9, D81
The paper (MS Word , 434kb)can be found here.
Here you can find the Experimental software ( 65kb download), and the Instructions for software (MS Word , 7kb) for running the experiment.
Here are the allocations (MS Excel , 48kb) that the subjects made, the parameters (MS Excel , 9kb) in the problems and Instructions for reading the data (MS Word , 12kb).
Here is the estimation software .