Articles

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

S. G. DIMMOCK, R. KOUWENBERG, O. S. MITCHELL, K. PEIJNENBURG

Journal of Risk and Uncertainty

16 December 2015, vol. 51, n°3, pp.219-244

Departments: Finance, GREGHEC (CNRS)

Keywords: Ambiguity. Decision-making under uncertainty. Multiple prior models. Alpha-MaxMin model

http://link.springer.com/article/10.1007/s11166-015-9227-2


We develop a tractable method to estimate multiple prior models of decisionmakingunder ambiguity. In a representative sample of the U.S. population, we measureambiguity attitudes in the gain and loss domains. We find that ambiguity aversion iscommon for uncertain events of moderate to high likelihood involving gains, butambiguity seeking prevails for low likelihoods and for losses. We show that choicesmade under ambiguity in the gain domain are best explained by the a-MaxMin model,with one parameter measuring ambiguity aversion (ambiguity preferences) and asecond parameter quantifying the perceived degree of ambiguity (perceptions aboutambiguity). The ambiguity aversion parameter a is constant and prior probability setsare asymmetric for low and high likelihood events. The data reject several othermodels, such as MaxMin and MaxMax, as well as symmetric probability intervals.Ambiguity aversion and the perceived degree of ambiguity are both higher for men andfor the college-educated. Ambiguity aversion (but not perceived ambiguity) is alsopositively 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 forlosses. Our model’s estimates for preferences and perceptions about ambiguity can beused to analyze the economic and financial implications of such preferences


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