An experiment on outcome uncertainty

We report the evidence of a multi-stage lab experiment on individual decision- making under ambiguity, where the latter is characterized by the (partial or) absence of information on some monetary values in the support of the lottery dis- tributions. This complements the standard treatment of uncertainty where decision- makers know the monetary prizes, but probabilities are uncertain. We use both a structural and a non-structural approach when analyzing subjects’ behavior under risk, compound risk and, outcome ambiguity. Our main finding is that subjects are risk-averse and ambiguity lovers in that they evaluate more optimistically uncertain payoffs under ambiguity compared to compound risk. We also study how subjects evaluate scenarios with uncertain outcomes: 60% of choices are consistent with the Expected Utility paradigm, while 40% of them are better described by a heu- ristic we label as “naïve,” in which the order of integration of Expected Utility is reversed (that is, they first form a point estimate of the uncertain payoffs, and then they evaluate the lotteries’ expected utility). Finally, we also find that risk and ambiguity aversion are positively correlated.