Estimating Ambiguity Preferences and Perceptions in Multiple Prior Models: Evidence from the Field

43 Pages Posted: 5 Jun 2015 Last revised: 4 Jan 2016

See all articles by Stephen G. Dimmock

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Roy Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Mahidol University - College of Management; Erasmus University Rotterdam (EUR)

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Kim Peijnenburg

Netspar; Centre for Economic Policy Research (CEPR); EDHEC Business School - Department of Economics & Finance

Date Written: June 3, 2015

Abstract

We develop a tractable method to estimate multiple prior models of decision-making under ambiguity. In a representative sample of the U.S. population, we measure ambiguity attitudes in the gain and loss domains. We find that ambiguity aversion is common for uncertain events of moderate to high likelihood involving gains, but ambiguity seeking prevails for low likelihoods and for losses. We show that choices made under ambiguity in the gain domain are best explained by the α-MaxMin model, with one parameter measuring ambiguity aversion (ambiguity preferences) and a second parameter quantifying the perceived degree of ambiguity (perceptions about ambiguity). The ambiguity aversion parameter α is constant and prior probability sets are asymmetric for low and high likelihood events. The data reject several other models, such as MaxMin and MaxMax, as well as symmetric probability intervals. Ambiguity aversion and the perceived degree of ambiguity are both higher for men and for the college educated. Ambiguity aversion (but not perceived ambiguity) is also positively 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 for losses. Our model’s estimates for preferences and perceptions about ambiguity can be used to analyze the economic and financial implications of such preferences.

Keywords: ambiguity, decision-making under uncertainty, multiple prior models, alpha-maxmin model

JEL Classification: D81, C93, C23

Suggested Citation

Dimmock, Stephen G. and Kouwenberg, Roy R. P. and Kouwenberg, Roy R. P. and Mitchell, Olivia S. and Peijnenburg, Kim, Estimating Ambiguity Preferences and Perceptions in Multiple Prior Models: Evidence from the Field (June 3, 2015). Journal of Risk and Uncertainty, vol. 51(3), December 2015, Available at SSRN: https://ssrn.com/abstract=2613923

Stephen G. Dimmock

National University of Singapore ( email )

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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Roy R. P. Kouwenberg (Contact Author)

Mahidol University - College of Management ( email )

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Thailand

HOME PAGE: http://https://www.cm.mahidol.ac.th/web/index.php/18-faculty/148-roy-kouwenberg-ph-d-cfa

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

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Erasmus University Rotterdam (EUR) ( email )

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Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

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National Bureau of Economic Research (NBER)

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Kim Peijnenburg

Netspar ( email )

P.O. Box 90153
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Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

EDHEC Business School - Department of Economics & Finance ( email )

France

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