We investigate risk and ambiguity attitudes among Ethiopian farmers in one of the poorest regions of the world. Strong risk aversion and ambiguity aversion were found with the Ethiopian farmers. We compared their attitudes to those of a Western university student sample elicited by the same decision task. Ambiguity aversion was similar for farmers and students, but farmers were more risk averse. Our results show that ambiguity aversion is not restricted to Western student populations, and that studies of agricultural decisions (...) may benefit from explicitly considering ambiguity attitudes. (shrink)

In the insurance literature, it is often argued that private markets can provide insurance against ‘risks’ but not against ‘uncertainties’ in the sense of Knight ([1921]) or Keynes ([1921]). This claim is at odds with the standard economic model of risk exchange which, in assuming that decision-makers are always guided by point-valued subjective probabilities, predicts that all uncertainties can, in theory, be insured. Supporters of the standard model argue that the insuring of highly idiosyncratic risks by Lloyd's of London proves (...) that this is so even in practice. The purpose of this article is to show that Bruno de Finetti, famous as one of the three founding fathers of the subjective approach to probability assumed by the standard model, actually made a theoretical case for uncertainty within the subjectivist approach. We draw on empirical evidence from the practice of underwriters to show how this case may help explain the reluctance of insurers to cover highly uncertain contingencies. (shrink)

In contract law, common mistake or frustration are grounds for relieving the promisor from the obligation to perform. Conventional economic theory justifies relief by appealing to its effect on the promisee’s incentives, namely, her incentives to act efficiently to prevent the unfavorable occurrence or its associated losses. The Article challenges this justification. While relief may indeed generate efficient incentives under certain conditions, these are not the conditions in which it is in fact granted. Consequently, the cases in which the conventional (...) theory recommends that relief be provided and those in which it is actually awarded, are incompatible. Based upon this premise, the Article develops a new theory of the law of common mistake and frustration, bearing descriptive and prescriptive implications. Under the new theory, the purpose of relief is not to incentivize promisees, but rather to determine the legal consequences of non-contemplated events. Viewed in this light, the Article identifies a new set of efficiency rationales for the rule. Under specified conditions, relief allows contracting parties to (1) refrain from welfare-reducing trade in unquantifiable risk; (2) maintain control over the distribution of contractual gains; and (3) overcome disincentives to form efficient contracts. The Article analyzes the conditions under which these virtues are applicable, and finds that they generally correspond to those in which relief is actually awarded. (shrink)

The most usual procedure when facing decisions in complex settings consists in consulting experts, aggregating the information they provide, and deciding on the basis of this aggregated information. We argue that such a procedure entails a substantial loss, insofar as it precludes the possibility to take into account simultaneously the decision maker’s attitude towards conflict among experts and her attitude towards imprecision of information. We propose to consider directly how a decision maker behaves when using information coming from several sources. (...) We give an axiomatic foundation for a decision criterion that allows to distinguish on a behavioral basis the decision maker’s attitude towards imprecision and towards conflict. (shrink)

This article deals with the impact of governmental assistance on insurance demand under ambiguity, i.e., in situations where probabilities are uncertain. First, using a model of insurance demand under ambiguity, we derive theoretical predictions about the impact of several governmental assistance programmes on optimal insurance demand. For example, governmental assistance through a fixed public support scheme implies that partial insurance is always optimal under fair insurance with ambiguity. Second, we present the results of an experiment designed to test these predictions. (...) We find support for several of our theoretical predictions. For example, the presence of governmental assistance through a fixed public support scheme decreases individuals’ willingness to pay to be fully insured. Finally, we compare these results with those obtained for a risk situation. We find that, regardless of the form of governmental assistance, participants in the ambiguity context are consistently willing to pay more to be fully insured than participants in the risk situation. (shrink)