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Estimating Ambiguity Aversion in a Portfolio Choice Experiment

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DateSep 3rd, 2013

Author

Shachar Kariv, PhD.

Read time 20 minutes

We report a portfolio-choice experiment that enables us to estimate parametric models of ambiguity aversion at the level of the individual subject. The assets are Arrow securities corresponding to three states of nature, where one state is risky with known probability and two states are ambiguous with unknown probabilities.

We estimate two specifications of ambiguity aversion, one kinked and one smooth that encompass many of the theoretical models in the literature. Each specification includes two parameters: one for ambiguity attitudes and another for risk attitudes.

We also estimate a three-parameter specification that includes an additional parameter for pessimism/optimism (underweighting/overweighting the probabilities of different payoffs).

The parameter estimates for individual subjects exhibit considerable heterogeneity. We cannot reject the null hypothesis of Subjective Expected Utility for a majority of subjects. Most of the remaining subjects exhibit statistically significant ambiguity aversion or seeking and/or pessimism or optimism

Estimating Ambiguity Aversion in a Portfolio Choice Experiment

gatsby-image

About author

Shachar Kariv, PhD.

He is also the Benjamin N. Ward Professor of Economics and the recent Chair of the Economics Department at the University of California, Berkeley – recognized as one of the world’s most impactful and influential economics institutions.

Shachar is widely regarded as the top decision theorist and game theorist in the world.