This chapter analyzes phenomena under uncertainty that did not show up under risk.§11.1 discusses how the Ellsberg paradox (Example 10.3.1) reveals the main new phenomenon. There are not many tractable models available in the literature to analyze ambiguity empirically. §11.2 proposes some special cases of RDU that can serve this purpose. Analyses in terms of risk and uncertainty premiums are in §11.3. Before turning to pragmatic ways of measuring ambiguity, §11.4–11.6 present some models alternative to RDU, so that these can also be discussed in the pragmatic analysis (although knowledge of these is not necessary for what follows). Besides source preference, which is related to optimism and elevation of the weighting curve (the motivational component in Figures 7.1.1–7.1.3), likelihood sensitivity is another important component of uncertainty attitudes, also depending on sources (the cognitive component in Figures 7.1.1–7.1.3). Tversky & Fox (1995) and Tversky & Wakker (1995) provided theoretical and empirical analyses of this condition for ambiguity. The pragmatic measurements of ambiguity aversion and likelihood sensitivity are presented in §11.7–11.8. Three appendices follow.

The Ellsberg paradox and the home bias as within-subject between-source comparisons

Sources of uncertainty will play a central role in this chapter. These are sets of uncertain events generated by the same mechanism. Further details will be provided later. The main new phenomenon that can be inferred from the Ellsberg paradox and that will be the topic of this chapter concerns different attitudes within the same person between different sources of uncertainty.