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Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers

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  • Ludwig, Alexander

    (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504)

  • Zimper, Alexander

    (Sonderforschungsbereich 504)

Abstract

We define pessimistic, respectively optimistic, investors as CEU (Choquet expected utility) decision makers who update their pessimistic, respectively optimistic, beliefs according to a pessimistic (Dempster-Shafer), respectively optimistic, update rule. This paper then demonstrates that, in contrast to optimistic investors, pessimistic investors may strictly prefer investing in an illiquid asset to investing in a liquid asset. Key to our result is the dynamic inconsistency of CEU decision making, implying that a CEU decision maker ex ante prefers a different strategy with respect to prematurely liquidating an uncertain long-term investment project than after learning her liquidity needs. Investing in an illiquid asset then serves as a commitment device guaranteeing an ex ante favorable outcome.

Suggested Citation

  • Ludwig, Alexander & Zimper, Alexander, 2004. "Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers," Sonderforschungsbereich 504 Publications 04-31, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:04-31
    Note: We thank Jürgen Eichberger, Itzhak Gilboa, and Nicolas Nalpas for helpful suggestions. Moreover, we appreciate the feedback from participants at FUR XI, Paris. Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim and from the Gesamtverband der Deutschen Versicherungswirtschaft is gratefully acknowledged.
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    Cited by:

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    2. Ani Guerdjikova & Alexander Zimper, 2008. "Flexibility of choice versus reduction of ambiguity," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 30(3), pages 507-526, April.
    3. Ludwig, Alexander & Zimper, Alexander, 2007. "Attitude polarization," Papers 07-66, Sonderforschungsbreich 504.
    4. Emy Lécuyer & Jean-Philippe Lefort, 2021. "Put–call parity and generalized neo-additive pricing rules," Theory and Decision, Springer, vol. 90(3), pages 521-542, May.
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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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