Ambiguity attitudes and economic behavior (original) (raw)

Ambiguity Aversion and Household Portfolio Choice: Empirical Evidence

2013

At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w18743.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Ambiguity aversion and wealth effects

Journal of Economic Theory, 2022

We study how changes in wealth affect ambiguity attitudes. We define a decision maker as decreasing (resp., increasing) absolute ambiguity averse if he becomes less (resp., more) ambiguity averse as he becomes richer. Our definition is behavioral. We provide different characterizations of these attitudes for a large class of preferences: monotone and continuous preferences which satisfy risk independence. We then specialize our results for different subclasses of preferences. Inter alia, our characterizations provide alternative ways to test experimentally the validity of some of the models of choice under uncertainty.

Estimating ambiguity preferences and perceptions in multiple prior models: Evidence from the field

Journal of Risk and Uncertainty, 2015

We develop a tractable method to estimate multiple prior models of decisionmaking under ambiguity. In a representative sample of the U.S. population, we measure ambiguity attitudes in the gain and loss domains. We find that ambiguity aversion is common for uncertain events of moderate to high likelihood involving gains, but ambiguity seeking prevails for low likelihoods and for losses. We show that choices made under ambiguity in the gain domain are best explained by the α-MaxMin model, with one parameter measuring ambiguity aversion (ambiguity preferences) and a second parameter quantifying the perceived degree of ambiguity (perceptions about ambiguity). The ambiguity aversion parameter α is constant and prior probability sets are asymmetric for low and high likelihood events. The data reject several other models, such as MaxMin and MaxMax, as well as symmetric probability intervals. Ambiguity aversion and the perceived degree of ambiguity are both higher for men and for the college-educated. Ambiguity aversion (but not perceived ambiguity) is also positively related to risk aversion. In the loss domain, we find evidence of reflection, implying that ambiguity aversion for gains tends to reverse into ambiguity seeking for losses. Our model's estimates for preferences and perceptions about ambiguity can be used to analyze the economic and financial implications of such preferences.

Off the Charts: Massive Unexplained Heterogeneity in a Global Study of Ambiguity Attitudes

The Review of Economics and Statistics, 2018

Ambiguity attitudes have been indicated as important determinants of economic outcomes in economic models, but we still know little about the demographic correlates of ambiguity attitudes, or indeed about the universality of patterns found in the West. We analyse the ambiguity attitudes of almost 3000 students across 30 countries. For gains we find ambiguity aversion everywhere, while ambiguity aversion is much weaker for losses. We also find ambiguity attitudes to systematically change with probabilities for both gains and losses, reflecting ambiguity-insensitivity to probabilities. Much of the between-country variation can be explained through a few macroeconomic characteristics. In contrast, we find massive unexplained variation at the individual level, suggesting that individual differences in ambiguity attitudes remain difficult to explain. We also find much unexplained heterogeneity in individual responses to different decision tasks. We conclude by discussing potential issues underlying this heterogeneity, and indicating potential solutions.

Ambiguity in Individual Choice and Market Environments: On the Importance of Comparative Ignorance

After Ellsberg's thought experiments brought focus to the relevance of missing information for choice, extensive efforts have been made to understand ambiguity theoretically and empirically (Ellsberg 1961). Fox and Tversky (1995) make an important contribution to understanding behavioral responses to ambiguity. In an individual choice setting they demonstrate that an aversion to ambiguous lotteries arises only when a comparison to unambiguous lotteries is available. The current study advances this literature by exploring the importance of Fox and Tversky's finding for market outcomes and finds support for their Comparative Ignorance Hypothesis in the market setting. Experiments in both individual choice and market settings examine behavior under risk and ambiguity. A sizeable effect of ambiguity on prices is observed-but only when the experimental treatment makes the risky and ambiguous assets easily comparable. Further, when ambiguity is salient, individual attitudes towards ambiguity and behavior in the marketplace are linked; ambiguity-averse subjects tend to avoid ambiguous assets in the marketplace. However, a simple experimental manipulation that makes the distinction between risk and ambiguity less apparent changes outcomes dramatically; the correlation between individual ambiguity attitudes and market allocations disappears, as do differences in market prices between risky and ambiguous assets.

The Impact of Ambiguity Prudence on Insurance and Prevention

SSRN Electronic Journal, 2015

Most decisions concerning (self-)insurance and self-protection have to be taken in situations in which a) the effort exerted precedes the moment uncertainty realises, and b) the probabilities of future states of the world are not perfectly known. By integrating these two characteristics in a simple theoretical framework, this paper derives plausible conditions under which ambiguity aversion raises the demand for (self-)insurance and self-protection. In particular, it is shown that in most usual situations where the level of ambiguity does not increase with the level of effort, a simple condition of ambiguity prudence known as decreasing absolute ambiguity aversion (DAAA) is sufficient to give a clear and positive answer to the question: Does ambiguity aversion raise the optimal level of effort?

Attitudes Toward and Perceptions of the Ambiguity of House and Stock Prices

26th Annual European Real Estate Society Conference

This study estimates individuals' attitudes toward and perceptions of ambiguity of house prices and stock prices, using experiment data from the Rand American Life Panel (ALP) survey. We estimate two important parameters in multiple prior models and α-MaxMin ambiguity preferences: the degree of ambiguity aversion and the degree of confidence in the reference prior distribution of future prices, this being a measurement of the perceived level of ambiguity. Regarding attitudes, we find that individuals are slightly ambiguity seeking with regard to house prices while they are slightly ambiguity averse with regard to stock prices. Their degree of confidence in the reference distribution for stocks is lower than for house prices. We also find that increased state-level house price volatility during the past year and growth of house price in the past three years increase perceived ambiguity. Moreover, ambiguity matters in that ambiguity-averse renters are less likely to buy a house. Correspondingly, ambiguity-averse stock investors tend to have less stock holdings.

Ambiguity Aversion and Stock Market Participation: Evidence from Fund Flows

RePEc: Research Papers in Economics, 2013

Stock market participation is very low, with approximately two thirds of all U.S. households not owning any public equity. This is a puzzle in the context of the basic Expected Utility model. One explanation put forward in the literature is that stock market participation is low because, in addition to risk, stocks also entail ambiguity and investors are ambiguity averse. We empirically test this hypothesis, measuring stock market participation using equity fund flows and ambiguity with dispersion in analyst forecasts about aggregate market returns. In a multivariate framework our results show that increases in ambiguity are significantly and negatively related to equity fund flows, and thus support the notion that limited market participation is related to ambiguity aversion.

Attitudes towards risk and ambiguity across gains and losses.

Theory and Decision

We use the multiple price list method and a recursive expected utility theory of smooth ambiguity to elicit attitudes to risky and ambiguous prospects. In particular we wish to investigate if there are differences in agent behaviour under uncertainty over gain amounts vis a vis uncertainty over loss amounts. On an aggregate level, we find that (i) subjects are risk averse over gain and risk seeking over losses, displaying a "reflection effect" as documented in Amos Tversky and Daniel Kahneman (1992) and (ii) they are mildly ambiguity averse over gains and are mildly ambiguity seeking over losses. Further analysis shows that on an individual level, and with respect to both risky and ambiguous prospects, there is limited incidence of reflection effects where subjects are risk/ambiguity averse (seeking) in gains and seeking (averse) in losses, though this incidence is higher for ambiguous prospects. A very high proportion of such cases of reflection exhibit risk (ambiguity) aversion in gains and risk (ambiguity) seeking in losses, with the reverse effect being significantly present in the case of risk but almost absent in case of ambiguity. Finally, our results suggest that reflection across gains and losses is not an individual trait but depends upon whether the form of uncertainty is precise or ambiguous since we rarely find an individual who exhibits reflection in both risky and ambiguous prospects.