This paper studies the impact of ambiguity and ambiguity aversion on equilibrium asset prices and portfolio holdings in competitive financial markets. It argues that attitudes toward ambiguity are heterogeneous across the population, just as attitudes toward risk are heterogeneous across the population, but that heterogeneity of attitudes toward ambiguity has different implications than heterogeneity of attitudes toward risk. In particular, when some state probabilities are not known, agents who are sufficiently ambiguity averse find open sets of prices for which they refuse to hold an ambiguous portfolio. This suggests a different cross-section of portfolio choices, a wider range of state price/probability ratios and different rankings of state price/probability ratios than would be predicted if state probabilities were known. Experiments confirm all of these suggestions. Our findings contradict the claim that investors who have cognitive biases do not affect prices because they are infra-marginal: ambiguity averse investors have an indirect effect on prices because they change the per-capita amount of risk that is to be shared among the marginal investors. Our experimental data also suggest a positive correlation between risk aversion and ambiguity aversion that might explain the "value effect" in historical data. JEL Classification: C91, D53, D81, G11, G12

We present experimental results on groups facing a decision problem analogous to that faced by a jury. We consider three treatment variables: group size (three or six), number of votes needed for conviction (majority or unanimity), and pre-vote deliberation. We find evidence of strategic voting under the unanimity rule: A large fraction of our subjects vote for a decision analogous to conviction even when their private information indicates a state analogous to innocence. This is roughly consistent with the game theoretic predictions of Feddersen and Pesendorfer. Although individual behavior is explained well by the game theoretic model, there are discrepancies at the level of the group decision. Contrary to Feddersen and Pesendorfer, in our experiments there are fewer outcomes analogous to incorrect convictions under unanimity rule than under majority rule. In the case of no deliberation, we simultaneously account for the individual and group data using quantal response equilibrium.

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