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Should I Stay or Should I Go?: A Laboratory Analysis of Investment Opportunities under Ambiguity

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  • Paul Viefers
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    Abstract

    This paper investigates the impact of uncertainty on an irreversible investment decisions in the laboratory. Subjects own the option to seize a claim on the future sum of realizations from an (ambiguous) random walk. I contrast model predicitions of the Subjective Expected Utility model (SEU, Savage, 1954) with model predictions made by Multiple-prior Expected Utility models (MEU, Gilboa & Schmeidler, 1989; Epstein & Schneider, 2003b). I present an experimental design that allows to identify behaviorally meaningful deviations from SEU. Observed behavior is at odds with the SEU prediction. On average, subjects in a treatment group, facing an ambiguous random walk, exhibit an ambiguity premium that presents a mark-up on average reservation profits in a control group. Hence, subjects shun to expose themselves to an ambiguous payoff process and invest later than participants facing a risky payoff process.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.406494.de/dp1228.pdf
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    Bibliographic Info

    Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1228.

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    Length: 15 : Anh. p.
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:diw:diwwpp:dp1228

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    Keywords: Ambiguity aversion; multiple priors; optimal stopping; irreversible investment;

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    1. Ryan Oprea & Daniel Friedman & Steven T. Anderson, 2009. "Learning to Wait: A Laboratory Investigation," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 1103-1124.
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    13. Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
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    28. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
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