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Subjective beliefs and ambiguity aversion

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  • Zhang, Yu

Abstract

This study finds a significant relationship between one’s subjective beliefs on a natural event and her degree of ambiguity aversion. By using a bins-and-balls experiment to elicit the entire subjective prior distribution of stock price growth next year, and an Ellsberg-urn experiment to elicit the degree of ambiguity aversion, we find that individuals exhibiting a higher degree of ambiguity aversion: (1) have lower expectations on future stock price growth rates; and (2) assign higher subjective probabilities on states representing negative growth, but lower subjective probabilities on states representing positive growth. These results thus have an important implication that studies testing the effect of ambiguity aversion on certain economic and financial behaviors are suggested to control subjective beliefs. Otherwise, the effect of ambiguity aversion may be overestimated.

Suggested Citation

  • Zhang, Yu, 2022. "Subjective beliefs and ambiguity aversion," Economics Letters, Elsevier, vol. 212(C).
    • Handle: RePEc:eee:ecolet:v:212:y:2022:i:c:s0165176522000118
    DOI: 10.1016/j.econlet.2022.110290
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    References listed on IDEAS

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    More about this item

    Keywords

    Subjective beliefs; Expectations; Ambiguity aversion;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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