Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses

This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity attitudes: ambiguity aversion for likely gains and unlikely losses and ambiguity seeking for unlikely gains and likely losses. Our data are most consistent with prospect theory and, to a lesser extent, α-maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns. (JEL D81, D83, G11, G12, G14)