The uncertainty triangle – Uncovering heterogeneity in attitudes towards uncertainty

This paper develops a graphical tool - the uncertainty triangle - that allows for testing whether choices under uncertainty obey the generalized axiom of revealed preference (GARP). We find that more than 95% of subjects made choices that can be rationalized by the maximization of a well-behaved uti...

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Bibliographic Details
Published in:Journal of risk and uncertainty 2020-04, Vol.60 (2), p.125-156
Main Authors: Burghart, Daniel R., Epper, Thomas, Fehr, Ernst
Format: Article
Language:English
Subjects:
Attitudes
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Environmental Economics
Expected utility
Heterogeneity
Microeconomics
Operations Research/Decision Theory
Uncertainty
Utility functions
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Summary:This paper develops a graphical tool - the uncertainty triangle - that allows for testing whether choices under uncertainty obey the generalized axiom of revealed preference (GARP). We find that more than 95% of subjects made choices that can be rationalized by the maximization of a well-behaved utility function. The uncertainty triangle also makes it straightforward to characterize heterogeneity in attitudes towards uncertainty. To accomplish this we propose a one-parameter extension of Expected Utility in which uncertainty attitude is everywhere constant in the triangle. Experimental data indicate that about 60% of participants made choices consistent with the model and, within this group, 48% were uncertainty averse, 22% uncertainty seeking, and 30% uncertainty neutral. The remaining 40% of participants appear to hold variable uncertainty attitudes. A model that can accommodate this variability is proposed and calibrated.
ISSN:0895-5646
1573-0476
DOI:10.1007/s11166-020-09331-8