Learning Under Ambiguity

Larry Epstein () and Martin Schneider ()

No 527, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

Abstract: This paper considers learning when the distinction between risk and ambiguity matters. It first describes thought experiments, dynamic variants of those provided by Ellsberg, that highlight a sense in which the Bayesian learning model is extreme - it models agents who are implausibly ambitious about what they can learn in complicated environments. The paper then provides a generalization of the Bayesian model that accommodates the intuitive choices in the thought experiments. In particular, the model allows decision-makers’ confidence about the environment to change — along with beliefs — as they learn. A calibrated portfolio choice application shows how this property induces a trend towards more stock market participation and investment.

Keywords: ambiguity; learning; noisy signals; ambiguous signals; quality information; portfolio choice; portfolio diversification; Ellsberg Paradox (search for similar items in EconPapers)
JEL-codes: D81 D83 D9 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-evo, nep-exp, nep-fin and nep-fmk
Date: 2006-04
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Related works:
Working Paper: Learning Under Ambiguity (2005)
Journal Article: Learning Under Ambiguity (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:roc:rocher:527

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