Investment behavior under ambiguity: the case of pessimistic decision makers

Alexander Ludwig and Alexander Zimper

No 04-31, Papers from Sonderforschungsbreich 504

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.

Keywords: Ambiguity; Choquet Expected Utility Theory; Bayesian Updating; Pessimism; Optimism (search for similar items in EconPapers)
JEL-codes: D81 G20 (search for similar items in EconPapers)
Date: 2004
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https://madoc.bib.uni-mannheim.de/2711/1/dp04_31.pdf

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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Persistent link: https://EconPapers.repec.org/RePEc:mnh:spaper:2711

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