Prudence attitude and limited participation

This paper examined how the trading behavior of individuals is altered by their attitudes toward objective probabilities. To this end, we adopted anticipated utility (combined with the Wang transform) to model market participants' wellbeing in an ambiguous context. In this case, different types of prudent traders with heterogeneous information were assumed in the market. Findings reveal that traders might limit their participation (even without ambiguity), whereas their prudence attitude drives them to cautiously trade the risky asset. We also extended our baseline model to explore the role of ambiguity and argue that ambiguity itself includes limited marginal effects on individuals' trading behavior. Moreover, two scenarios are considered wherein we respectively derive a unique general equilibrium: where traders 1) share the same prudence level and 2) have distinct prudence degrees. Consequently, the “chase-the-quantity” phenomenon is found in the equilibrium. Overall, this paper proposes a potential method for depicting individuals’ attitudes toward asset losses and gains, and provides some implications for comprehending their trading behavior under ambiguity.