The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation
We often deal with uncertain events for which no probabilities are known. Several normative models have been proposed. Descriptive studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces the source method, a tractable method for quantitatively analyzing uncertainty empirically. The theoretical key is the distinction between different sources of uncertainty, within which subjective (choice-based) probabilities can still be defined. Source functions convert those subjective probabilities into willingness to bet. We apply our method in an experiment, where we do not commit to particular ambiguity attitudes but let the data speak.
|Keywords||Knightian uncertainty, ambiguity aversion, belief measurement, decision making, home bias, nonexpected utility, probabilistic sophistication, probabilities, risk, source of uncertainty, subjective probability, uncertainty|
|JEL||Laboratory, Individual Behavior (jel C91), Criteria for Decision-Making under Risk and Uncertainty (jel D81)|
|Persistent URL||dx.doi.org/10.1257/aer.101.2.695, hdl.handle.net/1765/23269|
|Journal||The American Economic Review|
Abdellaoui, M, Baillon, A, Placido, L, & Wakker, P.P. (2011). The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation. The American Economic Review, 101(2), 695–723. doi:10.1257/aer.101.2.695