Learning under ambiguity: An experiment in gradual information processing

I investigate the effect of ambiguity on subjects’ willingness to trade under different information conditions. The results confirm the prediction of a wide set of theoretical models, that ambiguity aversion reduces willingness to trade in incomplete markets. Participants choose significantly wider bid-ask spreads when return distributions are ambiguous rather than objectively known. This effect also persists when subjects learn probabilities progressively. However, belief updating generates more-extreme quotes that are consistent with a particular updating rule–conditional smooth preferences. These findings highlight the role of gradual information release for belief confidence and underand overreaction in ambiguous markets. JEL-Classification: G02, G11, G14, C91, D81, D82

[1]  J. Jaffray.  Linear utility theory for belief functions , 1989 .

[2]  D. Prelec.  The Probability Weighting Function , 1998 .

[3]  E. Wagenmakers.  A practical solution to the pervasive problems ofp values , 2007, Psychonomic bulletin & review.

[4]  I. Gilboa,et al.  Maxmin Expected Utility with Non-Unique Prior , 1989 .

[5]  Ferdinand M. Vieider,et al.  Common components of risk and uncertainty attitudes across contexts and domains: evidence from 30 countries , 2015 .

[6]  Itzhak Gilboa,et al.  Updating Ambiguous Beliefs , 1992, TARK.

[7]  Philippe Jehiel,et al.  Non-Bayesian updating in a social learning experiment , 2018, J. Econ. Theory.

[8]  Cesaltina Pacheco Pires.  A Rule For Updating Ambiguous Beliefs , 2002 .

[9]  Sujoy Mukerji,et al.  Ambiguity Aversion and Incompleteness of Financial Markets , 2001 .

[10]  Chen Li,et al.  The Effect of Learning on Ambiguity Attitudes , 2017, Manag. Sci..

[11]  Jean-Yves Jaffray,et al.  An Experimental Study of Updating Ambiguous Beliefs , 1999, ISIPTA.

[12]  Larry G. Epstein,et al.  Ambiguity and Asset Markets , 2010 .

[13]  Ronald Fagin,et al.  A new approach to updating beliefs , 1990, UAI.

[14]  Mohammed Abdellaoui,et al.  The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation , 2011 .

[15]  Marciano M. Siniscalchi,et al.  Dynamic choice under ambiguity: Dynamic choice under ambiguity , 2011 .

[16]  David Porter,et al.  Reaction to Public Information in Markets: How Much Does Ambiguity Matter? , 2013 .

[17]  Takashi Ui,et al.  The Ambiguity Premium vs. the Risk Premium under Limited Market Participation , 2011 .

[18]  Leeat Yariv,et al.  Experimenting with Measurement Error: Techniques with Applications to the Caltech Cohort Study , 2015, Journal of Political Economy.

[19]  Larry G. Epstein,et al.  Dynamically Consistent Beliefs Must Be Bayesian , 1993 .

[20]  P. Jehiel,et al.  Updating ambiguous beliefs in a social learning experiment , 2016 .

[21]  Rakesh K. Sarin,et al.  Known, Unknown, and Unknowable Uncertainties , 2002 .

[22]  Massimo Marinacci,et al.  Revealed Ambiguity and Its Consequences: Updating , 2008 .

[23]  Ben Greiner,et al.  An Online Recruitment System for Economic Experiments , 2004 .

[24]  A. Baillon,et al.  Experimental elicitation of ambiguity attitude using the random incentive system , 2015, Experimental Economics.

[25]  Alain Chateauneuf,et al.  Choice under uncertainty with the best and worst in mind: Neo-additive capacities , 2007, J. Econ. Theory.

[26]  Marciano M. Siniscalchi,et al.  Ambiguity and Ambiguity Aversion , 2014 .

[27]  Maureen O'Hara,et al.  Microstructure and Ambiguity , 2010 .

[28]  Yaroslav Rosokha,et al.  Learning under compound risk vs. learning under ambiguity – an experiment , 2016 .

[29]  Rakesh K. Sarin,et al.  Effects of ambiguity in market experiments , 1993 .

[30]  Massimo Marinacci,et al.  MODEL UNCERTAINTY: Model Uncertainty , 2015 .

[31]  Peter Duersch,et al.  A dynamic Ellsberg urn experiment , 2012, Games Econ. Behav..

[32]  David Kelsey,et al.  Testing Dynamic Consistency and Consequentialism under Ambiguity , 2020 .

[33]  H. Henry Cao,et al.  Model Uncertainty, Limited Market Participation and Asset Prices , 2003 .

[34]  Paolo Ghirardato,et al.  Ambiguity in Asset Markets: Theory and Experiment , 2010 .

[35]  D. M. Grether,et al.  Bayes Rule as a Descriptive Model: The Representativeness Heuristic , 1980 .

[36]  A. Baillon,et al.  Learning under ambiguity: An experiment using initial public offerings on a stock market , 2013 .

[37]  Massimo Marinacci,et al.  Dynamic variational preferences , 2006, J. Econ. Theory.

[38]  J. Frank Yates,et al.  Characterization of Ambiguity in Decision Making. , 1976 .

[39]  Syngjoo Choi,et al.  Estimating Ambiguity Aversion in a Portfolio Choice Experiment , 2009 .

[40]  Arthur P. Dempster,et al.  Upper and Lower Probabilities Induced by a Multivalued Mapping , 1967, Classic Works of the Dempster-Shafer Theory of Belief Functions.

[41]  Jean-Yves Jaffray,et al.  Bayesian updating and belief functions , 1992, IEEE Trans. Syst. Man Cybern..

[42]  Massimo Marinacci,et al.  Recursive smooth ambiguity preferences , 2009, J. Econ. Theory.

[43]  I. Gilboa,et al.  Advances in Economics and Econometrics: Ambiguity and the Bayesian Paradigm , 2011 .

[44]  U. Fischbacher.  z-Tree: Zurich toolbox for ready-made economic experiments , 1999 .

[45]  M. Marinacci,et al.  A Smooth Model of Decision Making Under Ambiguity , 2003 .

[46]  M. Kocher,et al.  Selection into Auctions for Risky and Ambiguous Prospects , 2013 .

[47]  Martin Schneider,et al.  Recursive multiple-priors , 2003, J. Econ. Theory.

[48]  Martin Weber,et al.  Willingness-to-pay and willingness-to-accept for risky and ambiguous lotteries , 1995 .

[49]  L. Hartmann.  α-Maxmin Expected Utility with Non-Unique Prior , 2021 .

[50]  S. Werlang,et al.  Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio , 1992 .

[51]  Larry G. Epstein,et al.  Learning Under Ambiguity , 2002 .

[52]  Eran Hanany,et al.  Updating Preferences with Multiple Priors , 2006 .

[53]  Updating Beliefs when Evidence is Open to Interpretation: Implications for Bias and Polarization , 2018, Journal of the European Economic Association.

[54]  U. Weitzel,et al.  Does Ambiguity Aversion Survive in Experimental Asset Markets? , 2014 .

[55]  R. Zeckhauser,et al.  Investing in the Unknown and Unknowable , 2006 .

[56]  Colin Camerer,et al.  Recent developments in modelling preferences under risk , 1987 .

[57]  Yoram Halevy.  Ellsberg Revisited: An Experimental Study , 2005 .

[58]  Graham Loomes,et al.  Failures of the reduction principle in an Ellsberg-type problem , 1992 .