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Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses

Listed author(s):
  • Aurélien Baillon
  • Han Bleichrodt
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    This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity attitudes: ambiguity aversion for likely gains and unlikely losses and ambiguity seeking for unlikely gains and likely losses. Our data are most consistent with prospect theory and, to a lesser extent, ? -maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns. (JEL D81, D83, G11, G12, G14)

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    Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

    Volume (Year): 7 (2015)
    Issue (Month): 2 (May)
    Pages: 77-100

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    Handle: RePEc:aea:aejmic:v:7:y:2015:i:2:p:77-100
    Note: DOI: 10.1257/mic.20130196
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