Qiu, Jianying and Weitzel, Utz (2011): Reference dependent ambiguity aversion: theory and experiment.
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Abstract
In standard models of ambiguity, the evaluation of an ambiguous asset, as of a risky asset, is considered as an independent process. In this process only information directly pertaining to the ambiguous asset is used. These models face significant challenges from the finding that ambiguity aversion is more pronounced when an ambiguous asset is evaluated alongside a risky asset than in isolation. To explain this phenomenon, we developed a theoretical model based on reference dependence in probabilities. According to this model, individuals (1) form subjective beliefs on the potential winning probability of the ambiguous asset; (2) use the winning probability of the (simultaneously presented) risky asset as a reference point to evaluate the potential winning probabilities of the ambiguous asset; (3) code potential winning probabilities of the ambiguous asset that are greater than the reference point as gains and those that are smaller than the reference point as losses; (4) weight losses in probability heavier than gains in probability. We tested the crucial assumption, reference dependence in probabilities, in an experiment and found supporting evidence.
Item Type:  MPRA Paper 

Original Title:  Reference dependent ambiguity aversion: theory and experiment 
Language:  English 
Keywords:  Ambiguity Aversion, Reference Point, Comparison, Experiment 
Subjects:  G  Financial Economics > G1  General Financial Markets C  Mathematical and Quantitative Methods > C9  Design of Experiments 
Item ID:  35289 
Depositing User:  Jianying Qiu 
Date Deposited:  08. Dec 2011 20:06 
Last Modified:  21. Feb 2013 05:34 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/35289 
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