A Two-Ball Ellsberg Paradox: An Experiment

Abstract

We conduct an incentivized experiment on a nationally representative US sample \\ (N=708) to test whether people prefer to avoid ambiguity even when it means choosing dominated options. In contrast to the literature, we find that 55\% of subjects prefer a risky act to an ambiguous act that always provides a larger probability of winning. Our experimental design shows that such a preference is not mainly due to a lack of understanding. We conclude that subjects avoid ambiguity \textit{per se} rather than avoiding ambiguity because it may yield a worse outcome. Such behavior cannot be reconciled with existing models of ambiguity aversion in a straightforward manner.