The center and range of the probability interval as factors affecting ambiguity preferences

Abstract

Ambiguous decision situations are characterized as having probabilities that are uncertain. The uncertainty is due to the common, real-world deficiency of information about the process by which the outcomes are determined. Thirty lotteries having uncertain probabilities were constructed by varying the centers and the ranges of the intervals within which the imprecise probabilities of winning could lie. Pairs of the lotteries were presented as choice alternatives to subjects, with each pair having lotteries with the same interval center but differing interval ranges. Ambiguity avoidance, the selection of the less ambiguous option, was found to increase with the interval center C, with ambiguity indifference occurring for values of C [les] 0.40. No evidence of ambiguity seeking as the prevalent behavior was obtained. Ambiguity avoidance did not significantly increase with the interval range R, but an interaction effect between C and the ranges R1 and R2 of the choice pair was obtained. This effect of the ranges could not be described simply by knowledge of the difference R1 - R2; knowledge of both individual values was necessary. The theoretical implications of these results are discussed.