Ambiguity sensitive preferences in Ellsberg frameworks

Claudia Ravanelli () and Gregor Svindland ()
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Claudia Ravanelli: University of Zurich
Gregor Svindland: LMU Munich

Economic Theory, 2019, vol. 67, issue 1, No 3, 53-89

Abstract: Abstract We study the market implications of ambiguity sensitive preferences using the $$\alpha $$ α -maxmin expected utility ( $$\alpha $$ α -MEU) model. In the standard Ellsberg framework, we prove that $$\alpha $$ α -MEU preferences are equivalent to either maxmin, maxmax or subjective expected utility (SEU). We show how ambiguity aversion impacts equilibrium asset prices, and revisit the laboratory experimental findings in Bossaerts et al. (Rev Financ Stud 23:1325–1359, 2010). Only when there are three or more ambiguous states, $$\alpha $$ α -MEU, maxmin, maxmax and SEU models induce different portfolio choices. We suggest criteria to discriminate among these models in laboratory experiments and show that ambiguity seeking agents may prevent the existence of market equilibrium. Our results indicate that ambiguity matters for portfolio choice and does not wash out in equilibrium.

Keywords: Ellsberg framework; $$\alpha $$ α -maxmin expected utility model; Ambiguity aversion; Portfolio choice; Market equilibrium (search for similar items in EconPapers)
JEL-codes: C92 D53 G11 G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s00199-017-1095-3

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