Journal Article

Estimating ambiguity aversion in a portfolio choice experiment

Kariv, Shachar, Ahn, David, Choi, Syngjoo, Gale, Douglas

2014

Overview

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 that correspond 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.

• Publisher: The Econometric Society,Blackwell Publishing Ltd,John Wiley & Sons, Inc
• Subject: Ambiguity / ambiguity aversion / Attitudes / C91 / Choquet expected utility / contraction expected utility / D81 / Econometrics / Economic models / Expected utility / experiment / Investment analysis / maxmin expected utility / Null hypothesis / Optimism / Pessimism / pessimism/optimism / Portfolios / Probability / rank-dependent utility / recursive expected utility / recursive nonexpected utility / risk aversion / Specification / subjective expected utility / Subjectivity / Uncertainty / α‐maxmin expected utility