Ambiguity Attitudes Research Articles

Neural tracking of subjective value under riskand ambiguity in adolescence

Although many neuroimaging studies on adolescent risk taking have focused on brain activation during outcome valuation, less attention has been paid to the neural correlates of choice valuation. Subjective choice valuation may be particularly influenced by whether a choice presents risk (known probabilities) or ambiguity (unknown probabilities), which has rarely been studied in developmental samples. Therefore, we examined the neural tracking of subjective value during choice under risk and ambiguity in a large sample of adolescents (N = 188, 12–22 years). Specifically, we investigated which brain regions tracked subjective value coding under risk and ambiguity. A model-based approach to estimate individuals’ risk and ambiguity attitudes showed prominent variation in individuals’ aversions to risk and ambiguity. Furthermore, participants subjectively experienced the ambiguous options as being riskier than the risky options. Subjective value tracking under risk was coded by activation in ventral striatum and superior parietal cortex. Subjective value tracking under ambiguity was coded by dorsolateral prefrontal cortex (PFC) and superior temporal gyrus activation. Finally, overlapping activation in the dorsomedial PFC was observed for subjective value under both conditions. Overall, this is the first study to chart brain activation patterns for subjective choice valuation under risk and ambiguity in an adolescent sample, which shows that the building blocks for risk and ambiguity processing are already present in early adolescence. Finally, we highlight the potential of combining behavioral modeling with fMRI for investigating choice valuation in adolescence, which may ultimately aid in understanding who takes risks and why.

The Disposition Effect under the Reference Dependent Smooth Model of Ambiguity

The disposition effect is one of the representative puzzles observed in the financial market. Several theoretical explanations for the disposition effect have been tried, but we cannot yet say that they have been successful. The seminal paper of Barberis and Xiong (2009), which tries to explain the disposition effect by prospect theory, concludes the opposite of the effect appears if an investor gets her/his utility from the terminal wealth while the effect can be partially explained if he/she gets her/his utility from the realized gains and losses. We try to explain the effect by incorporating ambiguity attitude which varies depending on the reference point. We extend the smooth model of ambiguity by Klibanoff et al. (2005) to depend on the reference point. Numerical example shows that the disposition effect is more pronounced under our reference dependent smooth model of ambiguity if the investor gets her/his utility from the realized gains and losses although we cannot find superiority to the results of Barberis and Xiong (2009) if the utility is obtained from the terminal wealth.

Asset Pricing With Data Revisions

This paper documents the asset pricing implications of the data release process of National Income and Product Accounts (NIPA) consumption expenditure. We show that initial consumption data releases are more suitable for asset pricing than final revised releases. This is because most revisions smooth out important short-term consumption growth fluctuations. This also explains the documented success of non-revised proposals like garbage and electricity and unfiltered consumption which recover these lost short-term fluctuations. Yet, first revisions specifically incorporate novel information and their magnitude is strongly linked to uncertainty about consumption growth. On this basis, we formulate a new consumption-based model, the Revised CCAPM, which incorporates these effects from the release process using only NIPA vintage data. It explains a striking 75% of the cross-sectional variation in average returns on the 25 size-value portfolios, including a large part of the value premium, when featuring the first data release and state-dependent uncertainty coming from first revisions. These effects are consistent with investors' state-dependent ambiguity attitudes and are priced in the financial market as such.

An experimental study of adolescent behavior under peer observation: Adolescents are more impatient and inconsistent, not more risk-taking, when observed by peers

The majority of deaths in adolescence have been attributed to “risky” behaviors (Eaton et al., 2012) and therefore could be avoided had the adolescent made a different decision. In this paper, using two laboratory experiments we assess the impact of peer observation (a possible culprit of bad decision-making in adolescence) on the behavior of adolescents in risky conditions. We carefully separate risk attitudes from impatience, present bias, ambiguity attitudes, and inconsistency and in contradiction to what has been suggested in developmental psychology, we find that adolescents’ risk and ambiguity attitudes are not affected by observation. Instead, when observed by peers, adolescents become more impatient and inconsistent.

Learning and self-confirming long-run biases

We consider an ambiguity averse, sophisticated decision maker facing a recurrent decision problem where information is generated endogenously. In this context, we study self-confirming actions as the outcome of a process of active experimentation. We provide inter alia a learning foundation for self-confirming equilibrium with model uncertainty (Battigalli et al., 2015), and we analyze the impact of changes in ambiguity attitudes on convergence to self-confirming equilibria. We identify conditions under which the set of self-confirming equilibrium actions is invariant to changes in ambiguity attitudes, and yet ambiguity aversion may affect the dynamics. Indeed, we argue that ambiguity aversion tends to stifle experimentation, increasing the likelihood that the decision maker gets stuck into suboptimal “certainty traps.”

Boolean Representations of Preferences under Ambiguity

We propose a class of multiple-prior representations of preferences under ambiguity where the belief the decision-maker (DM) uses to evaluate an uncertain prospect is the outcome of a game played by two conflicting forces, Pessimism and Optimism. The model does not restrict the sign of the DM’s ambiguity attitude, and we show that it provides a unified framework through which to characterize different degrees of ambiguity aversion, as well as to represent context-dependent negative and positive ambiguity attitudes documented in experiments. We prove that our baseline representation, Boolean expected utility (BEU), yields a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni, and Marinacci, 2004), which drops uncertainty aversion from maxmin expected utility (Gilboa and Schmeidler, 1989), while extensions of BEU allow for more general departures from independence.

Mean-CVaR portfolio selection model with ambiguity in distribution and attitude

In this paper, we develop $ \alpha $-robust (maxmin) models, where the Conditional Value-at-Risk (CVaR) is to be optimized under ambiguity in distribution, mean returns, and covariance matrix. Our models allow the investor to distinguish ambiguity and ambiguity attitude with different levels of ambiguity aversion. For the case when there is a risk-free asset and short-selling is allowed, we obtain the analytic solution for the $ \alpha $-robust CVaR optimization model subject to a minimum mean return constraint. Moreover, we also derive a closed-form portfolio rule for the $ \alpha $-robust mean-CVaR optimization problem in a market without the risk-less asset. The results obtained from solving the numerical example show that if an investor is more ambiguity-averse, his investment strategy will always be more conservative.

Common Belief in Choquet Rationality and Ambiguity Attitudes – Extended Abstract

We consider finite games in strategic form with Choquet expected utility. Using the notion of (unambiguously) believed, we define Choquet rationalizability and characterize it by Choquet rationality and common beliefs in Choquet rationality in the universal capacity type space in a purely measurable setting. We also show that Choquet rationalizability is equivalent to iterative elimination of strictly dominated actions (not in the original game but) in an extended game. This allows for computation of Choquet rationalizable actions without the need to first compute Choquet integrals. Choquet expected utility allows us to investigate common belief in ambiguity love/aversion. We show that ambiguity love/aversion leads to smaller/larger Choquet rationalizable sets of action profiles.

Ambiguity aversion and wealth effects

We study how changes in wealth affect ambiguity attitudes. We define a decision maker as decreasing (resp., increasing) absolute ambiguity averse if he becomes less (resp., more) ambiguity averse as he becomes richer. Our definition is behavioral. We provide different characterizations of these attitudes for a large class of preferences: monotone and continuous preferences which satisfy risk independence. We then specialize our results for different subclasses of preferences. Inter alia, our characterizations provide alternative ways to test experimentally the validity of some of the models of choice under uncertainty.

Boolean Expected Utility

We propose a multiple-prior model of preferences under ambiguity that provides a unified lens through which to understand different formalizations of ambiguity aversion, as well as context-dependent negative and positive ambiguity attitudes documented in experiments. This model, Boolean expected utility (BEU), represents the belief the decision-maker uses to evaluate any uncertain prospect as the outcome of a game between two conflicting forces, Pessimism and Optimism. We prove, first, that BEU provides a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni, and Marinacci, 2004). Second, BEU accommodates rich patterns of ambiguity attitudes, which we characterize in terms of the relative power allocated to each force in the game.

Contract nonperformance risk and uncertainty in insurance markets

Insurance contracts may fail to perform, leading to a default on valid claims. We relax the standard assumption of known probabilities for such defaults by allowing for uncertainty. Within a large behavioral experiment, we show that introducing risk and uncertainty each leads to significant reductions in insurance demand and that the effects are comparable in magnitude (17.1 and 14.5 percentage points). Furthermore, risk- and ambiguity-averse participants are affected most. These findings are in line with models incorporating ambiguity attitudes or, alternatively, pessimistic beliefs. An analysis of the belief and decision dynamics suggests persistent pessimistic priors and disregard of peer experiences, leading to a stable uncertainty effect.

Discriminating Between Models of Ambiguity Attitude: a Qualitative Test

AbstractDuring recent decades, many new models have emerged in pure and applied economic theory according to which agents’ choices may be sensitive to ambiguity in the uncertainty that faces them. The exchange between Epstein (2010) and Klibanoff et al. (2012) identified a notable behavioral issue that distinguishes sharply between two classes of models of ambiguity sensitivity that are importantly different. The two classes are exemplified by the α-maxmin expected utility (MEU) model and the smooth ambiguity model, respectively; and the issue is whether or not a desire to hedge independently resolving ambiguities contributes to an ambiguity-averse agent's preference for a randomized act. Building on this insight, we implement an experiment whose design provides a qualitative test that discriminates between the two classes of models. Among subjects identified as ambiguity sensitive, we find greater support for the class exemplified by the smooth ambiguity model; the relative support is stronger among subjects identified as ambiguity averse. This finding has implications for applications that rely on specific models of ambiguity preference.

Measuring and Disentangling Ambiguity and Confidence in the Lab

In this paper we present a novel experimental procedure aimed at better understanding the interaction between confidence and ambiguity attitudes in individual decision making. Different ambiguity settings not only can be determined by the lack of information in possible scenarios completely “external” to the decision-maker, but can also be a consequence of the decision maker’s ignorance about her own characteristics or performance and, thus, deals with confidence. We design a multistage experiment where subjects face different sources of ambiguity and where we are able to control for self-assessed levels of competence. By means of a Principal Component Analysis, we obtain a set of measures of “internal” and “external” ambiguity aversion. Our regressions show that the two measures are significantly correlated at the subject level, that the subjects’ “internal” ambiguity aversion increases in performance in the high-competence task and that “external” ambiguity aversion moderately increases in earnings. Self-selection does not play any role.

Recursive non-expected utility: Connecting ambiguity attitudes to risk preferences and the level of ambiguity

I study how risk preferences and the level of ambiguity influence ambiguity attitudes in Uzi Segal's recursive second-order non-expected utility model. It is shown that the negative certainty independence axiom for risk preferences is equivalent to a global form of ambiguity aversion that entails ambiguity averse behavior irrespective of the state space and the decision maker's second-order belief. Thus, the second-order version of the cautious expected utility model is the only subclass of Segal's theory that robustly predicts ambiguity aversion. Moreover, a mean-preserving spread operation over second-order beliefs, which corresponds to a particular way of increasing the level of ambiguity, is equivalent to increasing the relative strength of ambiguity aversion for each possible specification of risk preferences within the cautious expected utility model. An application of the latter result establishes a negative relation between participation rates in an asset market and the level of ambiguity concerning the distribution of returns.

Ambiguity attitudes and self-confirming equilibrium in sequential games

We consider a game in extensive form recurrently played by agents who are randomly drawn from large populations and matched. We assume that preferences over actions at any information set admit a smooth-ambiguity representation in the sense of Klibanoff et al. (2005), which may induce dynamic inconsistencies. We take this into account in our analysis of self-confirming equilibrium (SCE) given players' feedback about the path of play. Battigalli et al. (2015) show that the set of SCE's of a simultaneous-move game with feedback expands as ambiguity aversion increases. We show by example that SCE in a sequential game is not equivalent to SCE applied to the strategic form of such game, and that the previous monotonicity result does not extend to general sequential games. Still, we provide sufficient conditions under which the monotonicity result holds for SCE.

The value of a statistical life under changes in ambiguity

The value of a statistical life (VSL) is a key parameter in the analysis of government policy. Most policy decisions are made under ambiguity. This paper studies the effect of changes in ambiguity perception on the VSL. We propose a definition of increases in ambiguity perception based on Ekern’s (1980) definition of increases in risk. Ambiguity aversion alone is not sufficient to lead to an increase in the VSL when the decision maker perceives more ambiguity. Our results highlight the importance of higher order ambiguity attitudes, particularly ambiguity prudence.

Boolean Representations of Preferences under Ambiguity

We propose a class of multiple-prior representations of preferences under ambiguity where the belief the decision-maker (DM) uses to evaluate an uncertain prospect is the outcome of a game played by two conflicting forces, Pessimism and Optimism. The model does not restrict the sign of the DMi?½s ambiguity attitude, and we show that it provides a unified framework through which to characterize different degrees of ambiguity aversion, as well as to represent context-dependent negative and positive ambiguity attitudes documented in experiments. We prove that our baseline representation, Boolean expected utility (BEU), yields a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni, and Marinacci, 2004), which drops uncertainty aversion from maxmin expected utility (Gilboa and Schmeidler, 1989), while extensions of BEU allow for more general departures from independence.

An Evolutionary Perspective on Updating Risk and Ambiguity Preferences

Using an approach based on evolution and adaptation, we provide foundations for a model of choice under uncertainty based on adaptive preferences, and we show that updating of those preferences in response to new information will respect dynamic consistency even at the cost of violating consequentialism. We argue that our approach can be applied in most contexts with ambiguity, and we establish that adaptive preferences nest variants of many models in the literature on risk and ambiguity as special cases. Since models of either ambiguity aversion or non-expected utility for risk cannot satisfy both dynamic consistency and consequentialism without strong assumptions on beliefs and information structures, our results add a novel perspective to the discourse about which of these properties should be maintained in applications. In addition, a central feature of adaptive preferences and the models they nest is a tight connection between ambiguity attitudes and violations of expected utility in the context of risk.

Dispersed Behavior and Perceptions in Assortative Societies

We propose a multiple-prior model of preferences under ambiguity that provides a unified lens through which to understand different formalizations of ambiguity aversion, as well as context-dependent negative and positive ambiguity attitudes documented in experiments. This model, Boolean expected utility (BEU), represents the belief the decision-maker uses to evaluate any uncertain prospect as the outcome of a game between two conflicting forces, Pessimism and Optimism. We prove, first, that BEU provides a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni, and Marinacci, 2004). Second, BEU accommodates rich patterns of ambiguity attitudes, which we characterize in terms of the relative power allocated to each force in the game.

The Impact of Overconfidence and Ambiguity Attitude on Market Entry

We study the behavioral drivers of market entry. An experiment allows us to disentangle the impact on entry across different types of markets of two key behavioral mechanisms: overconfidence and attitude toward ambiguity. We theorize and show that the causal effect of overconfidence on entry is limited to skill-based markets and does not appear in those that are chance based. Moreover, we also find that, independent of confidence levels, individuals exhibit ambiguity-seeking behavior when the result of the competition depends on their skills, which in turn leads to higher levels of entry. This preference for ambiguity can thus explain results that have previously been attributed to overconfidence. Our results challenge existing literature that has inferred overconfidence from differential entry levels across types of markets.