Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers

Alexander Ludwig and Alexander Zimper

No 4060, MEA discussion paper series from Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy

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.

JEL-codes: D81 G20 (search for similar items in EconPapers)
Date: 2004-11-10
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Investment behavior under ambiguity: The case of pessimistic decision makers (2006)
Working Paper: Investment behavior under ambiguity: the case of pessimistic decision makers (2004)
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