Ambiguity preferences and likelihood insensitivity for asymmetric events

Overview & Synopsis

We show that existing methods for measuring ambiguity attitudes for asymmetric events (i.e. unequally likely events) are prone to downward bias and misspecification. To address this, we propose a more robust approach and test it experimentally using both asymmetric and symmetric events (i.e. equally likely events) within the contexts of trust and coordination games. Our findings reveal that individuals i) prefer asymmetric events, showing lower ambiguity aversion compared to symmetric events, and ii) demonstrate greater likelihood insensitivity, as forming beliefs is more cognitively demanding for asymmetric events. These findings explain social ambiguity and strategic uncertainty in our experiment. We identify betrayal aversion as a disutility associated with trust decisions.