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Reference dependent ambiguity

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  • Mihm, Maximilian

Abstract

Motivated by experimental and empirical evidence, I study a framework where reference-points – such as a status quo, endowment, or default option – can distort the way an individual responds to ambiguity. I characterize a model of reference-dependent maxmin expected utility, and provide behavioral foundations for comparing reference-dependent ambiguity attitudes. I also illustrate some implications of reference-dependent ambiguity for trade in an asset market, including underdiversification, no-trade, and the potential for a market collapse.

Suggested Citation

  • Mihm, Maximilian, 2016. "Reference dependent ambiguity," Journal of Economic Theory, Elsevier, vol. 163(C), pages 495-524.
  • Handle: RePEc:eee:jetheo:v:163:y:2016:i:c:p:495-524
    DOI: 10.1016/j.jet.2016.02.006
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    3. Galanis, Spyros, 2018. "Financial complexity and trade," Games and Economic Behavior, Elsevier, vol. 112(C), pages 219-230.

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    More about this item

    Keywords

    Ambiguity; Reference-points; Market collapse;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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