Uncertainty Aversion in Game Theory: Experimental Evidence

Abstract      

This paper experimentally investigates the role of uncertainty aversion in normal form games.  Theoretically, risk aversion will affect the utility value assigned to realized outcomes while ambiguity aversion affects the evaluation of strategies.  In practice, however, utilities over outcomes are unobservable and the effects of risk and ambiguity are confounded.  This paper introduces a novel methodology for identifying the effects of risk and ambiguity preferences on behaviour in games in a laboratory environment.  Furthermore, we also separate the effects of a subject’s beliefs over her opponent’s preferences from the effects of her own preferences.  The results indicate that risk and ambiguity preferences affect behaviour in the normal form game.  In contrast, reported beliefs over opponents’ preferences are independent of behaviour in the normal form game.