Ellsberg Paradox: Ambiguity and Complexity Aversions Compared∗ Jarom´ırKov´aˇr´ık'yz Dan Levinx Tao Wang{ January 16, 2016 Abstract We present a simple model where preferences with complexity aver- sion, rather than ambiguity aversion, resolve the Ellsberg paradox. We test our theory using laboratory experiments where subjects choose among lotteries that \range" from a simple risky lottery, through risky but more complex lotteries, to one similar to Ellsberg's ambiguity urn. Our model ranks lotteries according to their complexity and makes different{at times contrasting{predictions than most models of ambiguity in response to ma- nipulations of prizes. The results support that complexity aversion pref- erences play an important and separate role from beliefs with ambiguity aversion in explaining behavior under uncertainty. Keywords: Ambiguity, Complexity, Compound Risk, Ellsberg paradox, Risk, Uncertainty. JEL Classification: C91, D01, D81. ∗Our paper greatly benefited from comments and suggestions of a referee and the Editor. We also thank Itzhak Gilboa, Yoram Halevy, Brian Hill, Dimitry Mezhvinsky, Jim Peck, and participants of the DT conference 2009 in HCE Paris and SEET 2013. Jarom´ır Kov´aˇr´ık greatly acknowledges support from Spanish Ministry of Science and Innovation (ECO 2012- 31626, ECO 2012-35820), the Basque Government (IT-783-13), and GACR (14-22044S). yDpto Fundamentos An´alisisEcon´omicoI & Bridge, University of the Basque Country, Av. Lehendakari Aguirre 83, 48015 Bilbao, Spain (
[email protected]). zCERGE-EI, a joint workplace of Charles University in Prague and the Economics Institute of the Czech Academy of Sciences, Politick´ych v˘ezˇn˚u7, 111 21 Prague, Czech Republic.