Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses
American Economic Journal: Microeconomics
vol. 7,
no. 2, May 2015
(pp. 77-100)
Abstract
This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity attitudes: ambiguity aversion for likely gains and unlikely losses and ambiguity seeking for unlikely gains and likely losses. Our data are most consistent with prospect theory and, to a lesser extent, α-maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns. (JEL D81, D83, G11, G12, G14)Citation
Baillon, Aurélien, and Han Bleichrodt. 2015. "Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses." American Economic Journal: Microeconomics, 7 (2): 77-100. DOI: 10.1257/mic.20130196Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading
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