SAFE Working Paper No. 311

Separating the Effects of Beliefs and Attitudes on Pricing under Ambiguity

The pricing of an ambiguous asset, whose cash flow stream is uncertain, may be affected by three factors: the belief regarding the realization likelihood of the cash flows, the subjective attitude towards risk, and the attitude towards ambiguity. While previous literature looks at the total price discount under ambiguity, this paper investigates with laboratory experiments how much price discount each factor can induce. We cleanly disentangle the price discount into three components: belief discount (ascribed to beliefs), risk discount (ascribed to risk aversion), and ambiguity discount (ascribed to ambiguity aversion). We find that under complete ambiguity, the ambiguity discount is the largest of the three components, and it is found to be around ten percent compared to neutrality. As information accumulates, the ambiguity discount decreases. We also find that beliefs do influence prices under ambiguity. In a parametric analysis, we provide estimates of the parameter of ambiguity aversion that are cleaner compared to previous studies, since the estimates are not confounded by beliefs.