Qiu, Jianying and Weitzel, Utz (2011): Reference dependent ambiguity aversion: theory and experiment.
This is the latest version of this item.
Download (879kB) | Preview
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|
|Keywords:||Ambiguity Aversion, Reference Point, Comparison, Experiment|
|Subjects:||G - Financial Economics > G1 - General Financial Markets
C - Mathematical and Quantitative Methods > C9 - Design of Experiments
|Depositing User:||Jianying Qiu|
|Date Deposited:||08 Dec 2011 20:06|
|Last Modified:||15 Jun 2016 05:15|
Abdellaoui, M., Baillon, A., Placido, L., and Wakker, P. P. (2011). The rich domain of uncertainty: Source functions and their experimental implementation. American Economic Review, 101(2):695–723.
Alevy, J. E. (2011). Ambiguity in individual choice and market environments: On the importance of comparative ignorance. Technical report.
Becker, G., DeGroot, M., and Marschak, J. (1964). Measuring utility by a single-response sequential method. Behavioral Science, 9(3):226–232.
Bossaerts, P., Ghirardato, P., Guarnaschelli, S., and Zame, W. R. (2010). Ambiguity in asset markets: Theory and experiment. Review of Financial Studies, 23(4):1325–1359.
Camerer, C. and Weber, M. (1992). Recent developments in modeling preferences: Un-certainty and ambiguity. Journal of Risk and Uncertainty, 5(4):325–70.
Chow, C. C. and Sarin, R. K. (2002). Known, unknown, and unknowable uncertainties. Theory and Decision, 52(2):127–138.
Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. The Quarterly Journal of Economics, 75(4):pp. 643–669.
Fox, C. R. and Tversky, A. (1995). Ambiguity aversion and comparative ignorance. The Quarterly Journal of Economics, 110(3):pp. 585–603.
Fox, C. R. and Weber, M. (2002). Ambiguity aversion, comparative ignorance, and decision context. Organizational Behavior and Human Decision Processes, 88(1):476–498.
Gilboa, I. and Schmeidler, D. (1989). Maxmin expected utility with non-unique prior. Journal of Mathematical Economics, 18(2):141–153.
Heath, C. and Tversky, A. (1991). Preference and belief: Ambiguity and competence in choice under uncertainty.
Journal of Risk and Uncertainty, 4(1):5–28. Kahneman, D. and Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2):pp. 263–292.
Klibano., P., Marinacci, M., and Mukerji, S. (2005). A smooth model of decision making under ambiguity. Econometrica, 73(6):1849–1892.
Nau, R. F. (2006). Uncertainty aversion with second-order utilities and probabilities. Management Science, 52(1):pp. 136–145.
Savage, L. J. (1972). The Foundations of Statistics. Courier Dover Publications.
Schmeidler, D. (1989). Subjective probability and expected utility without additivity. Econometrica, 57(3):571–87.
Tversky, A. and Kahneman, D. (1992). Advances in prospect theory: Cumulative repre-sentation of uncertainty. Journal of Risk and Uncertainty, 5(4):297–323.
Wakker, P. P. (2000). Uncertainty aversion: a discussion of critical issues in health eco-nomics. Health Economics, 9(3):261–263.
Available Versions of this Item
UNSPECIFIED (deposited UNSPECIFIED)
- Reference dependent ambiguity aversion: theory and experiment. (deposited 08 Dec 2011 20:06) [Currently Displayed]