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Three layers of uncertainty

Author

Listed:
  • Ilke Aydogan

    (IÉSEG School Of Management [Puteaux])

  • Loïc Berger

    (CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna])

  • Valentina Bosetti

    (Bocconi University [Milan, Italy], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna])

  • Ning Liu

    (BUAA - Beihang University)

Abstract
We explore decision-making under uncertainty using a framework that decom- poses uncertainty into three distinct layers: (1) risk, which entails inherent random- ness within a given probability model; (2) model ambiguity, which entails uncertainty about the probability model to be used; and (3) model misspecification, which en- tails uncertainty about the presence of the correct probability model among the set of models considered. Using a new experimental design, we isolate and measure attitudes towards each layer separately. We conduct our experiment on three different subject pools and document the existence of a behavioral distinction between the three layers. In addition to providing new insights into the underlying processes behind ambiguity aversion, we provide the first empirical evidence of the role of model misspecification in decision-making under uncertainty.

Suggested Citation

  • Ilke Aydogan & Loïc Berger & Valentina Bosetti & Ning Liu, 2022. "Three layers of uncertainty," Working Papers hal-03031751, HAL.
    • Handle: RePEc:hal:wpaper:hal-03031751
    DOI: 10.1093/jeea/jvad008
    Note: View the original document on HAL open archive server: https://hal.science/hal-03031751v2
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    Cited by:

    1. Loïc Berger, 2023. "A Randomness Device to Create the Conditions of Uncertainty," Working Papers hal-04071230, HAL.
    2. Berger, Loïc, 2022. "What is partial ambiguity?," Economics and Philosophy, Cambridge University Press, vol. 38(2), pages 206-220, July.
    3. Li, Jiangyan & Fairley, Kim & Fenneman, Achiel, 2024. "Does it matter how we produce ambiguity in experiments?," MPRA Paper 122336, University Library of Munich, Germany.

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    More about this item

    Keywords

    Ambiguity aversion; model uncertainty; model misspecification; non-expected utility; reduction of compound lotteries;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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