Essays on Decision Making: Intertemporal Choice and Uncertainty

This paper studies the effect of learning new information on peoples beliefs and their attitudes towards ambiguity. We propose a method to separate ambiguity attitudes from subjective probabilities and to decompose ambiguity attitudes into pessimism (capturing ambiguity aversion) and likelihood insensitivity. We apply our method in an experiment where we elicit the ask prices of options with payoffs depending on the returns of initial public offerings (IPOs) on the New York Stock Exchange. IPOs are a natural context in which to study the effect of learning, as no prior information about returns is available. The results indicate that there was significant likelihood insensitivity, which diminished with more information. We found little pessimism, which was largely unaffected as new information became available. Subjective probabilities were well-calibrated and close to true frequencies. Subjects behavior moved towards expected utility with more information, but substantial deviations remained even in the maximum information condition.