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Estimating ambiguity aversion in a portfolio choice experiment

Ahn, D.; Choi, S.; Gale, D.; Kariv, S.; (2007) Estimating ambiguity aversion in a portfolio choice experiment. (ELSE Working Papers 294). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Abstract

We report a laboratory experiment that enables us to estimate four prominent models of ambiguity aversion — Subjective Expected Utility (SEU), Maxmin Expected Utility (MEU), Recursive Expected Utility (REU), and α-Maxmin Expected Utility (α-MEU) — at the level of the individual subject. We employ graphical representations of three-dimensional budget sets over bundles of Arrow securities, one of which promises a unit payoff with a known probability and two with unknown (ambiguous) probabilities. The sample exhibits considerable heterogeneity in preferences, as captured through parameter estimates. Nonetheless, there exists a strong tendency to equate the demands for the securities that pay off in the ambiguous states. This feature is more easily accommodated by the α-MEU model than by the REU model.

Type: Working / discussion paper
Title: Estimating ambiguity aversion in a portfolio choice experiment
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php#2007
Language: English
Keywords: D81, C91
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14362
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