The Effect of Learning on Ambiguity Attitudes

Aurelien Baillon (), Han Bleichrodt, Umut Keskin (), Olivier l’Haridon () and Chen Li ()
Additional contact information
Umut Keskin: Istanbul Bilgi University, 34060 Eyup Istanbul, Turkey
Olivier l’Haridon: University of Rennes 1-Crem, 35000 Rennes, France
Chen Li: Erasmus School of Economics, 3062 PA Rotterdam, Netherlands
Authors registered in the RePEc Author Service: Olivier L'Haridon

Management Science, 2018, vol. 64, issue 5, 2181-2198

Abstract: This paper studies the effect of learning information on people’s attitudes toward ambiguity. We propose a method to separate ambiguity attitudes from subjective probabilities and to decompose ambiguity attitudes into two components. Under models like prospect theory that represent ambiguity through nonadditive decision weights, these components reflect pessimism and likelihood insensitivity. Under multiple priors models, they reflect ambiguity aversion and perceived ambiguity. We apply our method in an experiment where we elicit the ask prices of options with payoffs depending on the returns of initial public offerings (IPOs) on the New York Stock Exchange. IPOs are a natural context to study the effect of learning, as prior information about their returns is unavailable. Subjects perceived substantial ambiguity and they were insensitive to likelihood information. We observed only little pessimism and ambiguity aversion. Subjective probabilities were well calibrated and close to the true frequencies. Subjects’ behavior moved toward expected utility with more information, but substantial deviations remained even in the maximum information condition. Keywords: ambiguity; learning; updating; neo-additive weighting

Date: 2018
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Citations: View citations in EconPapers (17)

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Working Paper: The Effect of Learning on Ambiguity Attitudes (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:5:p:2181-2198

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