Question

Which of the following experiments would most cleanly allow you to provide evidence that ambiguity aversion occurs?

If an experiment requires people be randomly assigned to two groups, A describes what task/choice you've given to group A, and similarly for B.

The Special Coin refers to a special weighted coin is introduced that flips heads with an unknown probability. However, if a Special Coin is flipped *after another coin*, it has a 75% chance of showing the opposite answer of the first flip. So if you flip two Special Coins, and the first flip is H, there's a 75% chance the second flip is T.

Select one:

a. A: Choose between winning $10 if a regular coin flips heads, or winning $10 if the Special Coin flips heads.
B: Choose between winning $10 if flipping a Special Coin and then a regular coin gives HT (since the Special Coin went first, its special 75% thing doesn't matter), or winning $10 if flipping a Special Coin twice gives HT.

b. Choose between winning $10 if a regular coin flips heads, or winning $10 if two Special coins flip HT

c. A: Choose between winning $10 if a regular coin flips heads, or winning $10 if the Special Coin flips heads.
B: Choose between winning $10 if the first two flips of a regular coin are HT, or winning $10 if the first two flips of the Special Coin are HT.

d. A: Choose between winning $10 if a regular coin flips heads, or winning $10 if the Special Coin flips heads.
B: Choose between winning $10 if you flip two Special Coins and then a regular coin and get HTH, or winning $10 if you flip three Special Coins and get HTH.

Answer 1

In Behavioral Economics and Mathematics, ambiguity aversion is a phenomenon that refers to the general human tendency to prefer an option or decision which involves known risks or probability of the decision/option outcomes rather than unknown risks or probabilistic outcomes of any decision or option. In this context, the participants or people in an experiment is randomly divided into two groups: Group-A and Group-B and are given the option to flip a regular coin commonly assuming two outcomes( heads and tails) of equal or 50% probability for each outcome and/or a special coin with an unknown probabilistic outcome of head and 75% probability of getting an outcome that is opposite to the outcome of the first flip. Therefore, flipping the unknown coin clearly involves a completely uncertain or unknown probability of getting head in the first flip which also logically implies that the probability of getting a tail in the first flip is also unknown followed by a known probability of getting the opposite outcome in the second flip. In comparison, the participants already know the probability of the two outcomes while filliping the regular coin, even repeatedly. Therefore, if the participants or people from both groups choose between winning $10 if the regular coin flips heads and choosing $10 if the special coin flips heads or tails, then based on the notion of ambiguity aversion the participants would logically or rationally choose the first or former option which has a known probability of getting a heads compared to the second option which involves a completely unknown probability of getting the both outcome,heads or tails. Hence, the answer, in this case, would be option-b. given in the answer choices or options or choose between winning $10 if a regular coin flips heads, or winning $10 if two Special coins flip HT.