It is difficult to explain the price insensitive or infra-marginal behavior, an example of which is the behavior of credit markets during the recent financial crisis, by risk aversion alone. It is known that infra-marginal behavior may arise with ambiguity aversion. Furthermore, there appears to be fairly strong evidence of a close connection between ambiguity and conformity. Here we propose an...

The theory of subjective expected utility has been recently extended to allow ambiguity to matter for choice. We propose a notion of absolute ambiguity aversion by building on a notion of comparative ambiguity aversion. We characterize it for a preference model which encompasses some of the most popular models in the literature. We next build on these ideas to provide a definition of unambiguou...

Indemnifying smallholder farmers against crop loss is thought to be infeasible due to information problems. Consequently there is interest in developing alternative, partial, insurance products. Examples include rainfall insurance and the limited liability inherent in credit contracts. I argue that while these products may reduce information asymmetry, ambiguity averse farmers struggle to asses...

28 Risk and ambiguity are two conditions in which the consequences of possible 29 outcomes are not certain. Under risk the probabilities of different outcomes can 30 be estimated, while under ambiguity even these probabilities are not known. 31 Although most people exhibit at least some aversion to both risk and ambiguity, 32 the degree of these aversions is largely uncorrelated across subjects...

This paper considers when the utility function of the bidders is ambiguity averse, how does the bidding strategy differ in four classical auction mechanisms. In particular, if there is no information affiliation, i.e., when first order sealed auction is equivalent to English auction in terms of bidding, bidders may bid higher or lower relative to ambiguity neutral case. From the seller’s point ...

In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the second-order act approach à la Klibanoff, Marinacci, and Mukerji (2005) and the two-stage randomization approach à la Seo (2009). We characterize ...

Several papers, adopting an axiomatic approach to study decision making under ambiguity aversion, have produced conflicting predictions about how decision makers would behave in simple dynamic urn problems. We explore the concepts of ambiguity aversion and dynamic consistency, with examples of dynamic games against nature. Basically, a malevolent nature puts balls into the urn, and a fair natur...

This paper investigates the comparative statics of ”more ambiguity aversion” as defined by Klibanoff, Marinacci and Mukerji (2005). The analysis uses the static two-asset portfolio problem with one safe asset and one uncertain one. While it is intuitive that more ambiguity aversion would reduce demand for the uncertain asset, this is not necessarily the case. We derive sufficient conditions for...

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Real option valuation has traditionally been concerned with investment under project value uncertainty while assuming the agent has perfect confidence in a specific model. However, agents do not generally have perfect confidence in their model and this model uncertainty affects their decisions. In this work, we introduce a simple model for real option valuation to account for the agent’s aversi...