Experimental Studies on Ambiguity and Ambiguity Aversion

Project Start:01/2013
Status:Completed
Researchers:Jan Pieter Krahnen
Category: Financial Intermediation, Transparency Lab, Experiment Center
Funded by:LOEWE

merged with project 11130

 

Unlike in most existing models on financial markets, it is unrealistic to assume that market participants know exact probabilities of the states of the world. How do market participants deal with ambiguity? How does uncertainty regarding the distribution of risks in the financial system affect financial stability? The financial crisis has demonstrated possible consequences of imperfect information. The goal of this project is a theoretical and experimental analysis of the impact of ambiguous information about probabilities on market participants, price evolution, and the financial system.

A systematic analysis of individual attitudes towards ambiguity has been done based on laboratory experiments. Main findings are that ambiguity aversion on average is much more pronounced than human aversion against risk. Moreover, the results provide evidence that MEU (maxmin expected utility) does not adequately capture individual attitudes towards ambiguity.

Further work on ambiguity and learning and on the ambiguity about volatility is in progress.

 

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
55Measuring Ambiguity Aversion: A Systematic Experimental Approach2014 Financial Intermediation, Transparency Lab, Experiment Center ambiguity, valuation discount, experimental economics
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