Ambiguity aversion in the long run: Repeated decisions under risk and uncertainty

Liu, Hsin‐Hsien; Colman, Andrew M.

doi:10.1016/j.joep.2009.02.001

Cited by 55 publications

(44 citation statements)

References 35 publications

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“…This neglects the possibility of market feedback and learning across periods. Liu and Colman (2009) In fact, even in the last three periods in CM68, there exists a signicant ambiguity premium, suggesting a rather constant ambiguity eect. Also, neither of the other markets (CM48, DA48, DA68) display any consistent learning eects across periods (see table 3).…”

Section: Discussion and Robustnessmentioning

confidence: 99%

Does ambiguity aversion survive in experimental asset markets?

Füllbrunn

Rau

Weitzel

2014

Journal of Economic Behavior & Organization

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Although a number of theoretical studies explain empirical puzzles in nance with ambiguity aversion, it is not a given that individual ambiguity attitudes survive in markets. In fact, despite ample evidence of ambiguity aversion in individual decision making, most studies nd no or only limited ambiguity aversion in experimental nancial markets, even when they exclude arbitrage. We argue that ambiguity eects in markets depend on market feedback and on a suciently strong bias toward ambiguity among the participants. Accordingly, we nd signicant ambiguity eects in lowfeedback call markets for assets that provoke high ambiguity aversion, but no ambiguity eects in high-feedback double auctions. * Radboud University Nijmegen, IMR, Department of Economics, Thomas van Aquinostraat 5, 6525 GD Nijmegen, The Netherlands † Universität Erlangen-Nürnberg, Lehrstuhl für Volkswirtschaftslehre, insbesondere Wirtschaftstheorie, Lange Gasse 20, 90403 Nürnberg, Germany ‡ Radboud University Nijmegen, IMR, Department of Economics, Thomas van Aquinostraat 5, 6525 GD Nijmegen, The Netherlands (u.weitzel@fm.ru.nl) § We thank seminar participants at the ESA World Meeting in New York (2012), the Experimental Finance Conference in Luxembourg (2012), and the ESA European Meeting in Cologne (2012) for helpful comments. All remaining errors are ours. 1Electronic copy available at: http://ssrn.com/abstract=2227335 IntroductionMany real-life decisions are characterized by ambiguity, in which we lack important information such as the objective probabilities of the relevant states.Keynes (1921) proposed a simple thought experiment to illustrate the eects of ambiguity.Imagine [...] the two cases following of balls drawn from an urn. In each case we require the probability of drawing a white ball;in the rst case we know that the urn contains black and white in equal proportions; in the second case the proportions of each color is unknown, and each ball is as likely to be black as white. It is evident that in either case the probability of drawing a white ball is 1 /2, but that the weight of the argument in favor of this conclusion is greater in the rst case. (Keynes, 1921, Chapter VI.6) 1 Ellsberg (1961) used this experimental design, commonly referred to as the '2-color Ellsberg urn' to show that a preference for the risky urn (with measurable probabilities) over the ambiguous urn (with immeasurable probabilities) violates the Subjective Expected Utility Theory and the Sure-thing Principle of the Savage axioms (Savage, 1954). Since then a large body of individual choice experiments have conrmed that, on average, decision makers are 'ambiguity averse' when confronted with the above-quoted choice. 2In a recent survey of the experimental literature, Trautmann and Van De Kuilen (forthcoming) conclude that there is clear evidence that on the average, and across various elicitation methods, ambiguity aversion is the typical qualitative nding.Ambiguity aversion is a possible cause for a number of empirical puzzles in nancial economics, wh...

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Section: Discussion and Robustnessmentioning

confidence: 99%

Does ambiguity aversion survive in experimental asset markets?

Füllbrunn

Rau

Weitzel

2014

Journal of Economic Behavior & Organization

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“…This ambiguity aversion tendency was problematic, in that it led the majority to endorse choices that violated the independence axiom in EU theory. Liu and Colman [25] investigated the possibility that ambiguity aversion is reduced in the repeated-play case, and thus the potential violation of the independence axiom is likewise reduced. In…”

Section: Reducing Decision Anomaliesmentioning

confidence: 99%

Evaluations of Single‐ and Repeated‐Play Gambles

Wedell

2011

Wiley Encyclopedia of Operations Research and Management Science

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Choices and evaluations of risky prospects often violate norms of expected utility theory and the underlying normative principles of rational decision‐making. However, when risky prospects are represented as being repeatedly instantiated, choices and evaluations often change to conform more closely to the long‐run perspective reflected in normative models. Differences between responses for single and repeated gambles have been analyzed normatively, explored empirically, and evaluated theoretically. Normative analyses have argued both for and against changing behavior for single and repeated gambles. Empirically, shifts in behavior for single and repeated risky prospects are found to be common, stronger when outcomes are perceived as fungible, and stronger when the repeated outcome distribution is displayed. Furthermore, these shifts have been found to occur in both laboratory and real‐world settings and have been considered a possible moderator of violations of expected utility theory. A variety of theoretical explanations are posited to explain this behavior, including those that emphasize consequences of loss aversion as well as those that implicate alternative bases for evaluating single and repeated cases.

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“…We should note that some past experiments involving no learning possibility have shown a tilt toward uncertainty in repeated settings. Liu and Colman (2009) conducted experiments with repeated bets, each time with a newly assembled urn (hence no learning), and no switching opportunities. If the uncertain urn offers a larger prize and 100 repetitions are made, subjects prefer the uncertain urn, though they preferred the known urn on one trial.…”

Section: Resultsmentioning

confidence: 99%

Shunning uncertainty: The neglect of learning opportunities

Trautmann¹,

Zeckhauser²

2013

Games and Economic Behavior

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Financial, managerial, and medical decisions often involve alternatives whose possible outcomes have uncertain probabilities. In contrast to alternatives whose probabilities are known, these uncertain alternatives offer the benefits of learning. In repeat-choice situations, such learning brings value. If probabilities appear favorable (unfavorable), a choice can be repeated (avoided). In a series of experiments involving bets on the colors of poker chips drawn from bags, decision makers often prove to be blind to the learning opportunities offered by uncertain probabilities. Such decision makers violate rational decision making and forgo significant expected payoffs when they shun uncertain alternatives in favor of risky ones. Worse, when information is revealed, many make choices contrary to learning. A range of factors explain these violations. The results indicate that priming with optimal strategies offers little improvement.

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Ambiguity aversion in the long run: Repeated decisions under risk and uncertainty

Cited by 55 publications

References 35 publications

Does ambiguity aversion survive in experimental asset markets?

Does ambiguity aversion survive in experimental asset markets?

Evaluations of Single‐ and Repeated‐Play Gambles

Shunning uncertainty: The neglect of learning opportunities

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