Open AccessEstimating ambiguity aversion in a portfolio choice experiment
Author(s) -
Ahn David,
Choi Syngjoo,
Gale Douglas,
Kariv Shachar
Publication year - 2014
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe243
Subject(s) - ambiguity aversion , ambiguity , optimism , portfolio , pessimism , econometrics , economics , expected utility hypothesis , risk aversion (psychology) , actuarial science , psychology , mathematical economics , social psychology , financial economics , computer science , programming language , philosophy , epistemology
We report a portfolio‐choice experiment that enables us to estimate parametric models of ambiguity aversion at the level of the individual subject. The assets are Arrow securities that correspond to three states of nature, where one state is risky with known probability and two states are ambiguous with unknown probabilities. We estimate two specifications of ambiguity aversion, one kinked and one smooth, that encompass many of the theoretical models in the literature. Each specification includes two parameters: one for ambiguity attitudes and another for risk attitudes. We also estimate a three‐parameter specification that includes an additional parameter for pessimism/optimism (underweighting/overweighting the probabilities of different payoffs). The parameter estimates for individual subjects exhibit considerable heterogeneity. We cannot reject the null hypothesis of subjective expected utility for a majority of subjects. Most of the remaining subjects exhibit statistically significant ambiguity aversion or seeking and/or pessimism or optimism.