Estimating Ambiguity Aversion in a Portfolio Choice Experiment
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The authors employ graphical representations of three-dimensional budget sets over bundles of Arrow securities, one of which promises a unit payoff with a known probability and two with unknown (ambiguous) probabilities.Abstract:
We report a laboratory experiment that enables us to estimate four prominent models of ambiguity aversion — Subjective Expected Utility (SEU), Maxmin Expected Utility (MEU), Recursive Expected Utility (REU), and α-Maxmin Expected Utility (α-MEU) — at the level of the individual subject. We employ graphical representations of
three-dimensional budget sets over bundles of Arrow securities, one of which promises a unit payoff with a known probability and two with unknown (ambiguous) probabilities. The sample exhibits considerable heterogeneity in preferences, as captured through parameter estimates.
Nonetheless, there exists a strong tendency to equate the demands for the securities that pay off in the ambiguous states. This feature is more easily accommodated by the α-MEU model than by the REU model.read more
Citations
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Risk, Ambiguity, and the Rank-Dependence Axioms
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Revealing Preferences Graphically: An Old Method Gets a New Tool Kit
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References
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Book
Risk, Uncertainty and Profit
TL;DR: In Risk, Uncertainty and Profit, Frank Knight explored the riddle of profitability in a competitive market profit should not be possible under competitive conditions, as the entry of new entrepreneurs would drive prices down and nullify margins, however evidence abounds of competitive yet profitable markets as mentioned in this paper.
Journal ArticleDOI
Risk, Ambiguity, and the Savage Axioms
TL;DR: The notion of "degrees of belief" was introduced by Knight as mentioned in this paper, who argued that people tend to behave "as though" they assigned numerical probabilities to events, or degrees of belief to the events impinging on their actions.
Journal ArticleDOI
A theory of anticipated utility
TL;DR: In this paper, a cardinal utility theory with an associated set of axioms is presented, which is a generalization of the von Neumann-Morgenstern expected utility theory, which permits the analysis of phenomena associated with the distortion of subjective probability.
Book ChapterDOI
Subjective probability and expected utility without additivity
TL;DR: In this paper, an axiom of comonotonic independence is introduced, which weakens the von Neumann-Morgenstern axiom for independence, and the expected utility of an act with respect to the nonadditive probability is computed using the Choquet integral.