NANCY Seminar – Ilke AYDOGAN (IESEG)

Event details :

Title: Unraveling Compound Uncertainty Attitudes

Abstract: Uncertainty surrounding real-life decision-making situations often takes place in multiple stages requiring decision-makers to navigate compound uncertainty. For example, lifetime income typically depends first on securing a job in a relevant field after investing in higher education, and second on wage growth and promotion opportunities, which in turn hinge on uncertain labor market conditions and firm performance. Similarly, a farmer’s profit depends on the adoption of specific technologies, such as environmentally friendly practices, which carry uncertainties in yields and costs, and subsequent exposure to climate hazards.

This paper investigates the behavioral foundations of decision-making under compound (i.e., multi-stage) uncertainty. While many studies have treated compound lotteries as proxies for ambiguity (unknown probability distributions), they have relied largely on correlational evidence and have not precisely identified or quantified the underlying behavioral drivers. We show that violations of the normative reduction principle arise from two sources: inconsistent probability assignments and non-neutral attitudes toward perceived ambiguity. Using two experiments, we decompose and measure the relative contribution of each driver. Our findings indicate that violations of the reduction principle are driven primarily by ambiguity attitudes, which can be further divided into two components: ambiguity aversion and ambiguity insensitivity. This pattern holds across varying levels of participants’ quantitative sophistication, suggesting that compound uncertainty is intrinsically perceived as ambiguous.