Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses

This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity...

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Bibliographic Details
Published in:American economic journal. Microeconomics 2015-05, Vol.7 (2), p.77-100
Main Authors: Baillon, Aurélien, Bleichrodt, Han
Format: Article
Language:English
Subjects:
Ambiguity
Attitudes
Betting
Economic models
Economic statistics
Economic theory
Economic uncertainty
Expected utility
Experiments
Gains
Losses
Microeconomic modeling
Microeconomics
Modeling
Probability
Prospect theory
Stock market indices
Studies
Uncertainty
Validity
Violations
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Summary:This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity attitudes: ambiguity aversion for likely gains and unlikely losses and ambiguity seeking for unlikely gains and likely losses. Our data are most consistent with prospect theory and, to a lesser extent, α-maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns.
ISSN:1945-7669
1945-7685
DOI:10.1257/mic.20130196