Reference-Dependent Ambiguity Aversion

Abstract

This dissertation contributes to the growing literature in economics on ambiguity aversion. I identify an implicit reference-point assumption in the multiple priors model of Gilboa and Schmeidler (1989), generalize their decision theory to allow for stochastic reference-points, and study the market implications of endowment-dependent ambiguity aversion. Chapter 2 identifies the implicit reference-point assumption in the multiple priors model and provides an axiomatic characterization of a reference-dependent multiple priors model. I also provide an axiomatic characterization of a reference-dependent version of the Choquet Expected Utility model of Schmeidler (1989), which can accommodate different attitudes towards ambiguity. Chapter 3 studies the implications of reference-dependent ambiguity aversion when reference points are given by the endowment in an Arrow-Debreu exchange economy. I illustrate that no-trade and underinsurance are robust implications of ambiguity aversion when investors view ambiguity from the perspective of their endowments. Chapter 4 extends the decision model to intertemporal choice problems and studies the effects of reference-dependent ambiguity aversion in the context of a dynamic asset pricing model