Living with ambiguity: prices and survival when investors have heterogeneous preferences for ambiguity

Condie, Scott

doi:10.1007/s00199-007-0264-1

Cited by 27 publications

(14 citation statements)

References 18 publications

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“…This second e¤ect can compensate for the …rst one and thus result in survival. Hence, our paper extends the results by Condie (2008) by considering a more general class of ambiguity-averse consumers, clearly di¤erentiating between objective ambiguity and subjective ambiguity attitude and highlighting the role of di¤erent degrees of ambiguity aversion for survival.…”

Section: Related Literaturesupporting

confidence: 71%

“…The paper which is most closely related to our work is Condie (2008), which analyzes the issue of survival of max-min expected utility maximizers. Condie shows that even when the true probability distribution is contained in the prior of a max-min consumer, this consumer vanishes, unless he is completely insured.…”

Section: Related Literaturementioning

confidence: 99%

“…So far this question has been analyzed only for the case of max-min expected utility maximizers (as axiomatized by Gilboa and Schmeidler (1989)): Condie (2008) …nds that, unless there is no aggregate risk, these investors disappear from the market. The case of no aggregate risk, however, is special in that ambiguity averse investors are fully insured and, thus, have no e¤ect on prices.…”

Section: Introductionmentioning

confidence: 99%

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Survival with ambiguity

Guerdjikova¹,

Sciubba²

2015

Journal of Economic Theory

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We analyze a market populated by expected utility maximizers and smooth ambiguity-averse consumers. We study conditions under which ambiguity-averse consumers survive and a¤ect prices in the limit. If ambiguity vanishes with time or if the economy exhibits no aggregate risk, ambiguity-averse consumers survive, but have no long-run impact on prices. In both scenarios, ambiguity-averse consumers are fully insured against ambiguity in equilibrium and, thus, behave as expected utility maximizers with correct beliefs. If ambiguity-averse consumers are not fully insured against ambiguity, they behave as expected utility maximizers with e¤ectively wrong beliefs and an e¤ective discount factor which might be higher or lower than their actual discount factor. Using this insight, we demonstrate that consumers with constant absolute ambiguity aversion vanish in expectations, whenever the economy faces aggregate risk. In contrast, consumers with constant relative (and thus, decreasing absolute) ambiguity aversion survive in expectation and with positive probability and have a non-trivial impact on prices in the limit.

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Section: Related Literaturesupporting

confidence: 71%

Section: Related Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Survival with ambiguity

Guerdjikova¹,

Sciubba²

2015

Journal of Economic Theory

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“…Leippold et al (2008) extend this model in a continuous‐time framework. Condie (2008) analyses the impact of ambiguity aversion on asset prices when investors are heterogeneous with respect to their beliefs, their degree of risk aversion, and their degree of ambiguity aversion. He shows that ambiguity aversion is not sufficient to explain long run market prices.…”

Section: Imports Into Economicsmentioning

confidence: 99%

Decision Theory Under Ambiguity

Etner¹,

Jeleva²,

Tallon³

2010

Journal of Economic Surveys

247

125

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We review recent advances in the field of decision making under uncertainty or ambiguity. We start with a presentation of the general approach to a decision problem under uncertainty, as well as the 'standard' Bayesian treatment and issues with this treatment. We present more general approaches (Choquet expected utility, maximin expected utility, smooth ambiguity and so forth) that have been developed in the literature under the name of models of ambiguity sensitive preferences. We draw a distinction between fully subjective models and models incorporating explicitly some information. We review definitions and characterizations of ambiguity aversion in these models. We mention the challenges posed by some of the models presented. We end with a review of part of the experimental literature and applications of these models to economic settings.

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“…It is also instructive to ask what happens if some individuals are ambiguity averse and others are not. Condie (2008) asks this question in a complete markets economy which has at least one individual who is an expected utility maximizer with correct beliefs. He shows that if there is no aggregate risk, then ambiguity averse traders with correct beliefs in the set of beliefs they consider can survive, but they have no affect on asset prices.…”

Section: Non-seu Behaviormentioning

confidence: 99%

Heterogeneity, Selection, and Wealth Dynamics

Blume

Easley

2010

Annu. Rev. Econ.

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The market selection hypothesis states that, among expected utility maximizers, competitive markets select for agents with correct beliefs. In some economies this holds, while in others it fails. It holds in complete market economies with a common discount factor and bounded aggregate consumption. It can fail when markets are incomplete, when consumption grows too quickly, or when discount factors and beliefs are correlated. These insights have implication for the analysis of the heterogeneous agent stochastic dynamic general equilibrium models common in finance and macroeconomics.

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Living with ambiguity: prices and survival when investors have heterogeneous preferences for ambiguity

Abstract: Asset pricing, Recursive multiple priors, Survival, Heterogeneous investors, Ambiguity aversion, G12, D59,

Cited by 27 publications

References 18 publications

Survival with ambiguity

Survival with ambiguity

Decision Theory Under Ambiguity

Heterogeneity, Selection, and Wealth Dynamics

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