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

Author

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  • Aurélien Baillon
  • Han Bleichrodt

Abstract

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, ? -maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns. (JEL D81, D83, G11, G12, G14)

Suggested Citation

  • Aurélien Baillon & Han Bleichrodt, 2015. "Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 77-100, May.
    • Handle: RePEc:aea:aejmic:v:7:y:2015:i:2:p:77-100
    Note: DOI: 10.1257/mic.20130196
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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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