Information Aggregation Under Ambiguity: Theory and Experimental Evidence

We study information aggregation in a dynamic trading model with partially informed and ambiguity averse traders. We show theoretically that separable securities, introduced by Ostrovsky (2012) in the context of Subjective Expected Utility, no longer aggregate information if some traders have imprecise beliefs and are ambiguity averse. Moreover, these securities are prone to manipulation, as the degree of information aggregation can be influenced by the initial price, set by the uninformed market maker. These observations are also confirmed in our experiment, using prediction markets. We define a new class of strongly separable securities which are robust to the above considerations, and show that they characterize information aggregation in both strategic and non-strategic environments. We derive several theoretical predictions, which we are able to confirm in the lab

Social Preference Under Twofold Uncertainty

We investigate the conflict between the ex ante and ex post criteria of social welfare in a new framework of individual and social decisions, which distinguishes between two sources of uncertainty, here interpreted as an objective and a subjective source respectively. This framework makes it possible to endow the individuals and society not only with ex ante and ex post preferences, as is usually done, but also with interim preferences of two kinds, and correspondingly, to introduce interim forms of the Pareto principle. After characterizing the ex ante and ex post criteria, we present a first solution to their conflict that extends the former as much possible in the direction of the latter. Then, we present a second solution, which goes in the opposite direction, and is also maximally assertive. Both solutions translate the assumed Pareto conditions into weighted additive utility representations, and both attribute to the individuals common probability values on the objective source of uncertainty, and different probability values on the subjective source. We discuss these solutions in terms of two conceptual arguments, i.e., the by now classic spurious unanimity argument and a novel informational argument labelled complementary ignorance. The paper complies with the standard economic methodology of basing probability and utility representations on preference axioms, but for the sake of completeness, also considers a construal of objective uncertainty based on the assumption of an exogeneously given probability measure. JEL classification: D70; D81

Speculative Trade and the Value of Public Information

In environments with expected utility, it has long been established that speculative trade cannot occur (Milgrom and Stokey [1982]), and that the value of public information is negative in economies with risk-sharing and no aggregate uncertainty (Hirshleifer [1971], Schlee [2001]). We show that these results are still true even if we relax expected utility, so that either Dynamic Consistency (DC) or Consequentialism is violated. We characterise no speculative trade in terms of a weakening of DC and find that Consequentialism is not required. Moreover, we show that a weakening of both DC and Consequentialism is sufficient for the value of public information to be negative. We therefore generalise these important results for convex preferences which contain several classes of ambiguity averse preferences

Fair social decision under uncertainty and belief disagreements

This paper aims to address two issues related to simultaneous aggregation of utilities and beliefs. The first one is related to how to integrate both inequality and uncertainty considerations into social decision making. The second one is related to how social decision should take disagreements in beliefs into account. To accomplish this, whereas individuals are assumed to abide by Savage model’s of subjective expected utility, society is assumed to prescribe, either to each individual when the ex ante individual well-being is favored or to itself when the ex post individual well-being is favored, acting in accordance with the maximin expected utility theory of Gilboa and Schmeidler (J Math Econ 18:141–153, 1989). Furthermore, it adapts an ex ante Pareto-type condition proposed by Gayer et al. (J Legal Stud 43:151–171, 2014), which says that a prospect Pareto dominates another one if the former gives a higher expected utility than the latter one, for each individual, for all individuals’ beliefs. In the context where the ex ante individual welfare is favored, our ex ante Pareto-type condition is shown to be equivalent to social utility taking the form of a MaxMinMin social welfare function, as well as to the individual set of priors being contained within the range of individual beliefs. However, when the ex post individual welfare is favored, the same Pareto-type condition is shown to be equivalent to social utility taking the form of a MaxMinMin social welfare function, as well as to the social set of priors containing only weighted averages of individual beliefs

Dynamic Consistency, Valuable Information and Subjective Beliefs

Ambiguity sensitive preferences must fail either Consequentialism or Dynamic Consistency (DC), two properties that are compatible with subjective expected utility and Bayesian updating, while forming the basis of backward induction and dynamic programming. We examine the connection between these properties in a general environment of convex preferences over monetary acts and find that, far from being incompatible, they are connected in an economically meaningful way. In single-agent decision problems, positive value of information characterises one direction of DC. We propose a weakening of DC and show that one direction is equivalent to weakly valuable information, whereas the other characterises the Bayesian updating of the subjective beliefs which are revealed by trading behavior. In financial markets, we characterize no speculative trade, without requiring any form of Consequentialism, and show that there is weakly negative value of public information in risk-sharing environments with no aggregate uncertainty

Essays on Experimental Analysis of Decision-Making under Risk and Ambiguity

This thesis contributes to the experimental literature on decision-making under risk and ambiguity. In chapters 1 and 2, I study how environments of increased uncertainty, which I model as increased uncertainty about the probability of an event occurring (i.e., ambiguity), affect the decision-making process, in two settings: in chapter 1, I focus on how this increased uncertainty influences preferences over the timing of resolution of uncertainty. The results of the experiment show that in a lottery choice problem, as the ex-ante likelihood of the good outcome occurring goes up, participants turn from wanting to receive partial information before the resolution of uncertainty to being averse to it. This result has important theoretical and applied implications. In chapter 2, I analyse how social identity (e.g., political ideas, gender, ethnicity) and the stereotypical decisions made by people in the same social group are used as a reference point by decision-makers when making uncertain decisions. I find that increased uncertainty makes participants in the experiment more likely to choose the same decision as the majority of participants that belong to their social group, especially participants who do not feel a strong identification with the group. In chapter 3, my co-authors and I look at how a global social and economic shock (namely, the COVID-19 pandemic) affects risk preferences in a sample of students and professional traders. We find no significant effect of the crisis on these preferences. This result gives support to standard economic theory, which considers these preferences to be stable. We also study if the crisis affects personality traits that are economically relevant, such as trust or locus of control. We find that some of these traits do change during the pandemic. The effect, however, is heterogeneous across samples of traders and students

Condorcet meets Ellsberg

The Condorcet Jury Theorem states that given subjective expected utility maximization and common values, the equilibrium probability that the correct candidate wins goes to one as the size of the electorate goes to infinity. This paper studies strategic voting when voters have pure common values but may be ambiguity averse -- exhibit Ellsberg-type behavior -- as modeled by maxmin expected utility preferences. It provides sufficient conditions so that the equilibrium probability of the correct candidate winning the election is bounded above by one half in at least one state. As a consequence, there is no equilibrium in which information aggregates

Optimal insurance under adverse selection and ambiguity aversion

We consider a model of competitive insurance markets under asymmetric information with ambiguity-averse agents who maximize their maxmin expected utility. The interaction between asymmetric information and ambiguity aversion gives rise to some interesting results. First, for some parameter values, there exists a unique pooling equilibrium where both types of insurees buy full insurance. Second, in separating equilibria where the low risks are underinsured, their equilibrium contract involves more coverage than under standard expected utility. Finally, due to the endogeneity of commitment to the menus offered by insurers, our model has always an equilibrium which is unique (in terms of allocation) and interim incentive efficient (second-best)

Social preference under twofold uncertainty

We investigate the conflict between the ex ante and ex post criteria of social welfare in a novel axiomatic framework of individual and social decisions, which distinguishes between a subjective and an objective source of uncertainty. This framework permits us to endow the individuals and society not only with ex ante and ex post preferences, as is classically done, but also with interim preferences of two kinds, and correspondingly, to introduce interim forms of the Pareto principle. After characterizing the ex ante and ex post criteria, we present a first solution to their conflict that amounts to extending the former as much possible in the direction of the latter. Then, we present a second solution, which goes in the opposite direction, and is our preferred one. This solution combines the ex post criterion with an objective interim Pareto principle, which avoids the pitfalls of the ex ante Pareto principle, and especially the problem of "spurious unanimity" discussed in the literature. Both solutions translate the assumed Pareto conditions into weighted additive utility representations, and both attribute common individual probability values only to the objective source of uncertainty