Measuring and Disentangling Ambiguity and Confidence in the Lab

Abstract

In this paper we present a novel experimental procedure aimed at better understanding the interaction between confidence and ambiguity attitudes in individual decision making. Different ambiguity settings not only can be determined by the lack of information in possible scenarios completely “external„ to the decision-maker, but can also be a consequence of the decision maker’s ignorance about her own characteristics or performance and, thus, deals with confidence. We design a multistage experiment where subjects face different sources of ambiguity and where we are able to control for self-assessed levels of competence. By means of a Principal Component Analysis, we obtain a set of measures of “internal„ and “external„ ambiguity aversion. Our regressions show that the two measures are significantly correlated at the subject level, that the subjects’ “internal„ ambiguity aversion increases in performance in the high-competence task and that “external„ ambiguity aversion moderately increases in earnings. Self-selection does not play any role.

Keywords

• ambiguity
• confidence
• competence
• precision
• self-selection