The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation

Mohammed Abdellaoui (1) , Laetitia Placido (2, 1) , Aurélien Baillon (3) , P.P. Wakker

1 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC
2 CES - Centre d'économie de la Sorbonne
3 GRID - Groupe de Recherche sur le risque, l'Information et la Décision

We often deal with uncertain events for which no probabilities are known. Several normative models have been proposed. Descriptive studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces the source method, a tractable method for quantitatively analyzing uncertainty empirically. The theoretical key is the distinction between different sources of uncertainty, within which subjective (choice-based) probabilities can still be defined. Source functions convert those subjective probabilities into willingness to bet. We apply our method in an experiment, where we do not commit to particular ambiguity attitudes but let the data speak.

Keywords: Uncertainty; Source Functions; Experimental Implementation

Domains: Economy and decision science

Mohammed Abdellaoui, Laetitia Placido, Aurélien Baillon, P.P. Wakker. The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation. American Economic Review, 2011, 101 (2), pp.695-723. ⟨10.1257/aer.101.2.695⟩. ⟨hal-00609214⟩