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Ellsberg paradox

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offered a choice between red and yellow balls and black and yellow balls, people assume that there must be fewer than 30 yellow balls as would be necessary to deceive them. When making the decision, it is quite possible that people simply neglect to consider that the experimenter does not have a chance to modify the contents of the urn in between the draws. In real-life situations, even if the urn is not to be modified, people would be afraid of being deceived on that front as well.
419:. Indeed, the amount of the payoff is likewise irrelevant. Whichever gamble is selected, the prize for winning it is the same, and the cost of losing it is the same (no cost), so ultimately there are only two outcomes: receive a specific amount of money or nothing. Therefore, it is sufficient to assume that the preference is to receive some money to nothing (this assumption is not necessary: in the mathematical treatment above, it was assumed 1807: 1797: 407:. If the participant strictly prefers Gamble A to Gamble B, by utility theory, it is presumed this preference is reflected by the expected utilities of the two gambles. We reach a contradiction in our utility calculations. This contradiction indicates that the participant's preferences are inconsistent with the expected-utility theory. 450:—all gambles involve risk. By choosing Gamble D, the participant has a 1 in 3 chance of receiving nothing, and by choosing Gamble A, a 2 in 3 chance of receiving nothing. If Gamble A was less risky than Gamble B, it would follow that Gamble C was less risky than Gamble D (and vice versa), so the risk is not averted in this way. 586:
range (the probability of getting a black ball). The average person expects there to be fewer black balls than yellow balls because, in most real-world situations, it would be to the advantage of the experimenter to put fewer black balls in the urn when offering such a gamble. On the other hand, when
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Gamble C to Gamble D if and only if the participant believes that drawing a red or yellow ball is more likely than drawing a black or yellow ball. It might seem intuitive that if drawing a red ball is more likely than drawing a black ball, drawing a red or yellow ball is also more likely than drawing
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Ellsberg's findings indicate that choices with an underlying level of risk are favored in instances where the likelihood of risk is clear, rather than instances in which the likelihood of risk is unknown. A decision-maker will overwhelmingly favor a choice with a transparent likelihood of risk, even
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There have been various attempts to provide decision-theoretic explanations of Ellsberg's observation. Since the probabilistic information available to the decision-maker is incomplete, these attempts sometimes focus on quantifying the non-probabilistic ambiguity that the decision-maker faces – see
457:, which cannot be accounted for in expected utility theory. It has been demonstrated that this phenomenon occurs only when the choice set permits the comparison of the ambiguous proposition with a less vague proposition (but not when ambiguous propositions are evaluated in isolation). 524:
the expected utility and maximize the robustness against uncertainty in the imprecise probabilities. This robust-satisficing approach can be developed explicitly to show that the choices of decision-makers should display precisely the preference reversal that Ellsberg observed.
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Another possible explanation is that this type of game triggers a deceit aversion mechanism. Many humans naturally assume in real-world situations that if they are not told the probability of a certain event, it is to deceive them. Participants make the same decisions in the
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is a widely received alternative to utility maximization, taking into account ambiguity-averse preferences. This model reconciles the notion that intuitive decisions may violate the ambiguity neutrality, established within both the Ellsberg Paradox and
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containing 90 balls: 30 balls are red, while the remaining 60 balls are either black or yellow in unknown proportions. The balls are well mixed so that each ball is as likely to be drawn as any other. The participants then choose a gambling scenario:
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Typically, participants were seen to be indifferent between bet 1A and bet 2A (consistent with expected utility theory) but were seen to strictly prefer Bet 1A to Bet 1B and Bet 2A to 2B. This result is generally interpreted to be a consequence of
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as they would about related but not identical real-life problems where the experimenter would be likely to be a deceiver acting against the subject's interests. When faced with the choice between a red ball and a black ball, the probability of
224:(also known as uncertainty aversion); people intrinsically dislike situations where they cannot attach probabilities to outcomes, in this case favoring the bet in which they know the probability and utility outcome (0.5 and $ 1 respectively). 652:
in 1952, Ellsberg left immediately to serve as a US Marine before coming back to Harvard in 1957 to complete his post-graduate studies on decision-making under uncertainty. Ellsberg left his graduate studies to join the
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Other alternative explanations include the competence hypothesis and the comparative ignorance hypothesis. Both theories attribute the source of the ambiguity aversion to the participant's pre-existing knowledge.
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the expected utility is also impossible. The info-gap approach supposes that the agent implicitly formulates info-gap models for the subjectively uncertain probabilities. The agent then tries to
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scandal then encircling Ellsberg's life. The book is considered a highly-influential paper and is still considered influential within economic academia about risk ambiguity and uncertainty.
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a black or yellow ball. So, supposing the participant strictly prefers Gamble A to Gamble B, it follows that he/she will also strictly prefer Gamble C to Gamble D, and similarly conversely.
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To describe how an individual would take decisions in a world where uncertainty aversion exists, modifications of the expected utility framework have been proposed. These include:
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integral used as a way of measuring expected utility in situations with unknown parameters. The mathematical principle is seen as a way in which the contradiction between
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Yasuhiro Sakai, Daniel Ellsberg on J.M. Keynes and F.H. Knight: risk ambiguity and uncertainty. Evolutionary and Institutional Economics Review. 2018. (16): 1-18
513:. No probability information whatsoever is provided regarding other outcomes, so the participant has very unclear subjective impressions of these probabilities. 453:
However, because the exact chances of winning are known for Gambles A and D and not known for Gambles B and C, this can be taken as evidence for some sort of
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There are two urns each containing 100 balls. It is known that urn A contains 50 red and 50 black, but urn B contains an unknown mix of red and black balls.
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In light of the ambiguity in the probabilities of the outcomes, the agent is unable to evaluate a precise expected utility. Consequently, a choice based on
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as a strategic analyst but continued to do academic work on the side. He presented his breakthrough paper at the December 1960 meeting of the
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Ellsberg's experimental research involved two separate thought experiments: the 2-urn 2-color scenario and the 1-urn 3-color scenario.
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I. Gilboa and D. Schmeidler. Maxmin expected utility with non-unique prior. Journal of Mathematical Economics, 18(2):141–153, 1989.
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popularized the paradox in his 1961 paper, "Risk, Ambiguity, and the Savage Axioms". It is generally taken to be evidence of
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However, ambiguity aversion would predict that people would strictly prefer Gamble A to Gamble B, and Gamble D to Gamble C.
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Heath, Chip; Tversky, Amos (1991). "Preference and Belief: Ambiguity and Competence in Choice under Uncertainty".
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Additionally, the participant may choose a separate gamble scenario within the same situational parameters:
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Ellsberg's findings violate assumptions made within common Expected Utility Theory, with participants
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Utility theory models the choice by assuming that in choosing between these gambles, people assume a
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The experimental conditions manufactured by Ellsberg serve to rely upon two economic principles:
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they believe that drawing a red ball is more likely than drawing a black ball (according to
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Mathematically, the estimated probabilities of each color ball can be represented as
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in instances where the unknown alternative will likely produce greater
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that the non-red balls are yellow versus black, and then compute the
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Since the prizes are the same, it follows that the participant will
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Daniel Ellsberg's 1962 paper, "Risk, Ambiguity, and Decision"
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Info-gap Decision Theory: Decisions Under Severe Uncertainty
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You receive $ 100 if you draw a black or yellow ball
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Academic Press. section 11.1. 1128: 8: 728:, pp. 75–76, paragraph 315, footnote 2. 446:In addition, the result holds regardless of 105:published a version of the paradox in 1921. 256:You receive $ 100 if you draw a black ball 1796: 1135: 1121: 1113: 1086: 1029:Foundations of Rational Choice Under Risk 979: 877: 69:Learn how and when to remove this message 743:"Risk, Ambiguity, and the Savage Axioms" 617:Maxmin expected utility: Axiomatized by 253:You receive $ 100 if you draw a red ball 32:This article includes a list of general 718: 725: 474:) probability for possible outcomes. 7: 591:Decisions under uncertainty aversion 121:. When offered choices with varying 1057:. London: Macmillan. pp. 75–76 934:Lima Filho, Roberto (2 July 2009). 415:The result holds regardless of the 1453:What the Tortoise Said to Achilles 648:Upon graduating in Economics from 303:, of which red balls are drawn at 38:it lacks sufficient corresponding 14: 351:of the two gambles individually. 1806: 1805: 1795: 23: 968:Journal of Risk and Uncertainty 865:Quarterly Journal of Economics 751:Quarterly Journal of Economics 1: 1065:– via Internet Archive. 821:International Economic Review 477:One such attempt is based on 411:The generality of the paradox 339:Utility theory interpretation 1847:Probability theory paradoxes 1842:Paradoxes in utility theory 1033:. Oxford University Press. 702:Subjective expected utility 669:, challenging the dominant 99:subjective expected utility 1868: 16:Paradox in decision theory 1832:Decision-making paradoxes 1791: 1054:A Treatise on Probability 909:Ben-Haim, Yakov (2006). 635:Alternative explanations 600:Choquet expected utility 479:info-gap decision theory 1372:Paradoxes of set theory 612:Expected utility theory 431:($ 100) <  423:($ 100) >  391:Numerical demonstration 367:expected utility theory 53:more precise citations. 697:Experimental economics 671:rational choice theory 608:rational choice theory 1837:Statistical paradoxes 468:Knightian uncertainty 461:Possible explanations 361:Gamble A to Gamble B 294:Knightian uncertainty 129:Experimental research 1738:Kavka's toxin puzzle 1510:Income and fertility 1049:Keynes, John Maynard 1025:Anand, Paul (1993). 439:($ 100) =  1852:Thought experiments 1397:Temperature paradox 1320:Free choice paradox 1184:Fitch's knowability 811:Segal, Uzi (1987). 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Index

references
inline citations
improve
introducing
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decision theory
paradox
subjective expected utility
John Maynard Keynes
Daniel Ellsberg
ambiguity aversion
utility
risk
ambiguity aversion
urn
Knightian uncertainty
probability
if and only if
expected utility theory
utility function
risk aversion
ambiguity aversion
Knightian uncertainty
Bayesian
info-gap decision theory
satisfice
experiment
Choquet expected utility
subadditive
rational choice theory

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