Ambiguity in Asset Markets: Theory and Experiment

This paper studies the impact of ambiguity and ambiguity aversion on equilibrium asset prices and portfolio holdings in competitive financial markets. It argues that attitudes toward ambiguity are heterogeneous across the population, just as attitudes toward risk are heterogeneous across the population, but that heterogeneity of attitudes toward ambiguity has different implications than heterogeneity of attitudes toward risk. In particular, when some state probabilities are not known, agents who are sufficiently ambiguity averse find open sets of prices for which they refuse to hold an ambiguous portfolio. This suggests a different cross-section of portfolio choices, a wider range of state price/probability ratios and different rankings of state price/probability ratios than would be predicted if state probabilities were known. Experiments confirm all of these suggestions. Our findings contradict the claim that investors who have cognitive biases do not affect prices because they are infra-marginal: ambiguity averse investors have an indirect effect on prices because they change the per-capita amount of risk that is to be shared among the marginal investors. Our experimental data also suggest a positive correlation between risk aversion and ambiguity aversion that might explain the "value effect" in historical data.Ambiguity, Experiments, Financial Markets, Heterogeneity

Information Aggregation in Double Auctions: Rational Expectations and the Winner's Curse

This paper inquires about the ability of double auction institutions to aggregate information in the context of a "common value" information structure that is known to produce the winner's curse in sealed bid environments. While many fundamental features of the economic trading mechanism are different from those studied in the context of sealed bids, the pattern of information distributed to the population of traders is the same. This gives us an opportunity to determine if the behaviors reported in sealed bid environments can be detected in the more active market environment. As such, the experiments are also a test of the robustness of earlier experiments that demonstrate that in economies with homogeneous preferences single compound securities organized by double auctions are able to aggregate information. The basic result is that a severe winner's curse is not observed. The irrationality observed in sealed bids does not extend itself to the double auction environment. Information aggregation is observed and the rational expectations model receives support

Financing the Transformation of Food Systems Under a Changing Climate

The global food system will need to produce food more efficiently and sustainably to achieve the Sustainable Development Goals (‘SDGs’) and meet the 2°C climate commitments of the Paris Agreement. As climate change affects food systems, governments, food and agriculture companies, and public and private investors need to better identify and address the numerous climate-related risks they face. This can be an inflection point to seize the new investment opportunities that the transformation to low-carbon and resilient food systems presents. This will require addressing core market failures to unlocking private sector financing from food and agriculture companies, domestic and international financial institutions, and specialized investors. Against this backdrop, the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS) and its partners propose three solutions: i) Create investment opportunities in the transformation of food systems; ii) Accurately assess risk and deploy appropriate risk-mitigating mechanisms; iii) Intermediate/match to the respective risk-return profiles of different sources of private capital. In addition, the paper provides a set of recommended strategies for each potential solution, as well as a detailed roadmap on how to finance the transformation of food systems under a changing climate

Essays on Uncertainty: An Axiomatization and Economic Applications

This thesis deals with individual decision making under uncertainty and extends standard economic and financial models with risk in order to model attitudes towards ambiguity. Empirical violations of the leading theories of choice have pointed out the relevance of ambiguity on individual choices. Much empirical evidence, inspired by Ellsberg's experiment, shows that people prefer bets whose odds of winning are known, thus suggesting aversion to ambiguity. The relevance of uncertainty is pervasive in economic literature as well as in the real world. Investment decisions and asset pricing, insurance contracts, voting in elections, gambling, buying a car or planning a trip can all be thought as choices under both risk and ambiguity. The aim of this work is normative and descriptive. In the first part of the work, I concentrate on a theoretical model of focused regret as an extension of the classical paradigm of choice theory. From the alternatives in this literature, I focus on the multiple prior model, originally axiomatized by Gilboa and Schmeidler, where ambiguity is formalized as a set of plausible probability distributions to represent agents' beliefs. Then I turn to economic and financial applications and challenge the descriptive power of classical economic models when explaining, for example, asset pricing or insurance contracting. Lastly, the most innovative part of this work is an experimental investigation of the multiple priors model in a financial market, through which I find evidence for both risk and ambiguity to affect individual decision making and asset pricing.</p

An Experimental Study of Jury Decision Rules

We present experimental results on individual decisions in juries. We consider the effect of three treatment variables: the size of the jury (three or six), the number of votes needed for conviction (majority or unanimity), and jury deliberation. We nd evidence of strategic voting under the unanimity rule, where the form of strategic behavior involves a bias to vote guilty to compensate for the unanimity requirement. A large fraction of jurors vote to convict even when their private information indicates the defendant is more likely to be innocent than guilty. This is roughly consistent with the game theoretic predictions of Feddersen and Pesendorfer (FP) [1998]. While individual behavior is explained well by the game theoretic model, at the level of the jury decision, there are numerous discrepancies. In particular, contrary to the FP prediction, we nd that in our experiments juries convict fewer innocent defendants under unanimity rule than under majority rule. We are able to simul..

Ambiguity in Asset Markets: Theory and Experiment

This paper studies the impact of ambiguity and ambiguity aversion on equilibrium asset prices and portfolio holdings in competitive financial markets. It argues that attitudes toward ambiguity are heterogeneous across the population, just as attitudes toward risk are heterogeneous across the population, but that heterogeneity of attitudes toward ambiguity has different implications than heterogeneity of attitudes toward risk. In particular, when some state probabilities are not known, agents who are sufficiently ambiguity averse find open sets of prices for which they refuse to hold an ambiguous portfolio. This suggests a different cross section of portfolio choices, a wider range of state price/probability ratios, and different rankings of state price/probability ratios than would be predicted if state probabilities were known. Experiments confirm all of these suggestions. Our findings contradict the claim that investors who have cognitive biases do not affect prices because they are inframarginal: ambiguity-averse investors have an indirect effect on prices because they change the per capita amount of risk that is to be shared among the marginal investors. Our experimental data also suggest a positive correlation between risk aversion and ambiguity aversion that might explain the "value effect" in historical data. (JEL G11, G12, C92, D53

Ambiguity in Asset Markets: Theory and Experiment

This paper studies the impact of ambiguity and ambiguity aversion on equilibrium asset prices and portfolio holdings in competitive financial markets. It argues that attitudes toward ambiguity are heterogeneous across the population, just as attitudes toward risk are heterogeneous across the population, but that heterogeneity of attitudes toward ambiguity has different implications than heterogeneity of attitudes toward risk. In pa rticular, when some state probabilities are not known, agents who are sufficiently ambiguity averse find open sets of prices for which they refuse to hold an ambiguous portfolio. This suggests a different cross section of portfolio choices, a wider range of state price/probability ratios, and different rankings of state price/probability ratios than would be predicted if state probabilities were known. Experiments confirm all of these suggestions. Our findings contradict the claim that investors who have cognitive biases do not affect prices because they are inframarginal: ambiguity-averse investors have an indirect effect on prices because they change the per capita amount of risk that is to be shared among the marginal investors. Our experimental data also suggest a positive correlation between risk aversion and ambiguity aversion that might explain the "value effect" in historical data. The Author 2010 Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.