Measuring ambiguity attitudes: Theory and experiments

Individuals often encounter prospects whose outcomes cannot be assigned precise probabilities. The decisions that individuals make in such situations may be affected by their attitudes towards ambiguity. I develop a method to measure individuals' ambiguity attitudes and use this to test for heterogeneity in ambiguity aversion within and between small-scale investors in China and US college students. I further ask whether ambiguity attitudes correlate with background characteristics. Finally, I discuss applications of these findings on predicting individual decisions in seeking challenges.;In the first essay, I ask the subjects to state their desired level of investment at different return rates in situations of ambiguity or risk. This allows me to calculate bounds for ambiguity aversion on a subject-by-subject basis. The measure is orthogonal to existing measures of risk and allows us to predict the subjects' decisions in other ambiguous situations. Additionally, while almost all consistently behaved student subjects are ambiguity averse or neutral, females (Asians) are more ambiguity averse than males (Caucasians). In the second essay, we conducted quasi-field experiments in Chinese brokerage houses to investigate how investors react to ambiguity relative to quantifiable risks, and the degree of heterogeneity in these reactions. We find a significant degree of heterogeneity in ambiguity attitudes across investors ranging from ambiguity averse to ambiguity loving. We find no significant correlation between ambiguity attitudes and risk attitudes but a relationship between education and the variance of ambiguity attitudes. We also uncover an emotional correlate of ambiguity aversion: investors reported to be more anxiety-prone during the trading day are measured to be more ambiguity averse.;In the third essay, I investigate the relationship between gender differences in ambiguity attitudes and in seeking challenges. The measured ambiguity attitudes do not predict subjects' decisions in seeking or avoiding challenges. Subjects' subsequent choices seem to be affected by the task difficulty level they have seen as well as their beliefs of their performance level. Furthermore, the task difficulty level that the subjects have encountered seems to subtly affect the ambiguity attitudes of the subjects, hence contributing to both the differences in seeking challenges and those in ambiguity attitudes.