The Effects of Skewed Probability on Decision Making under Ambiguity

Studies have shown that many decision makers knowingly contradict the Savage Postulates when event probabilities are ambiguous, typically displaying ambiguity aversion. For the purposes of this paper, ambiguity is defined operationally as a subjective second-order distribution on probabilities, f(p). Most studies to date on ambiguity have focused on symmetric second-order distributions, demonstrating preference effects of the mean and range or variance of f(p). This research asserts that choice behavior is also significantly and systematically impacted by the skewness of f(p). An experiment using 130 MBA students revealed that subjects are often ambiguity averse when f(p) is negatively skewed but ambiguity seeking when the skewness is positive, even though the mean and variance of f(p) remain constant. These skewness effects are incorporated into a model of choice under ambiguity.