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


  • Aurélien Baillon
  • Han Bleichrodt


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)

Suggested Citation

  • Aurélien Baillon & Han Bleichrodt, 2015. "Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 77-100, May.
  • Handle: RePEc:aea:aejmic:v:7:y:2015:i:2:p:77-100 Note: DOI: 10.1257/mic.20130196

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    References listed on IDEAS

    1. Brusco, Sandro, 2006. "Perfect Bayesian implementation in economic environments," Journal of Economic Theory, Elsevier, vol. 129(1), pages 1-30, July.
    2. Bikhchandani, Sushil, 2006. "Ex post implementation in environments with private goods," Theoretical Economics, Econometric Society, vol. 1(3), pages 369-393, September.
    3. Anton, James J. & Brusco, Sandro & Lopomo, Giuseppe, 2010. "Split-award procurement auctions with uncertain scale economies: Theory and data," Games and Economic Behavior, Elsevier, vol. 69(1), pages 24-41, May.
    4. Jacob K. Goeree & Theo Offerman, 2003. "Competitive Bidding in Auctions with Private and Common Values," Economic Journal, Royal Economic Society, vol. 113(489), pages 598-613, July.
    5. Carlier, Guillaume, 2001. "A general existence result for the principal-agent problem with adverse selection," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 129-150, February.
    6. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
    7. Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 161-169, April.
    8. Larson, Nathan, 2009. "Private value perturbations and informational advantage in common value auctions," Games and Economic Behavior, Elsevier, vol. 65(2), pages 430-460, March.
    9. Susan Athey & Ilya Segal, 2013. "An Efficient Dynamic Mechanism," Econometrica, Econometric Society, vol. 81(6), pages 2463-2485, November.
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    Cited by:

    1. Alex Voorhoeve & Ken Binmore & Arnaldur Stefansson & Lisa Stewart, 2016. "Ambiguity attitudes, framing, and consistency," Theory and Decision, Springer, vol. 81(3), pages 313-337, September.
    2. Jim Engle-Warnick & Sonia Laszlo, 2017. "Learning-by-doing in an ambiguous environment," Journal of Risk and Uncertainty, Springer, vol. 55(1), pages 71-94, August.
    3. Konstantinos Georgalos, 2016. "Dynamic decision making under ambiguity," Working Papers 112111041, Lancaster University Management School, Economics Department.
    4. Dimmock, Stephen G. & Kouwenberg, Roy & Mitchell, Olivia S. & Peijnenburg, Kim, 2016. "Ambiguity aversion and household portfolio choice puzzles: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 119(3), pages 559-577.
    5. Martin G. Kocher & Amrei Marie Lahno & Stefan T. Trautmann, 2015. "Ambiguity aversion is the exception," QuBE Working Papers 033, QUT Business School.
    6. Guillaume Hollard & Sébastien Massoni & Jean-Christophe Vergnaud, 2016. "In search of good probability assessors: an experimental comparison of elicitation rules for confidence judgments," Theory and Decision, Springer, vol. 80(3), pages 363-387, March.
    7. repec:eee:eecrev:v:101:y:2018:i:c:p:268-283 is not listed on IDEAS
    8. Nihad Aliyev & Xue-Zhong He, 2017. "Ambiguous Market Making," Research Paper Series 383, Quantitative Finance Research Centre, University of Technology, Sydney.
    9. Müller, Julia & Li, Zhihua & Wakker, Peter P. & Wang, Tong V., 2016. "The Rich Domain of Ambiguity Explored," Annual Conference 2016 (Augsburg): Demographic Change 145734, Verein für Socialpolitik / German Economic Association.
    10. Stephen Dimmock & Roy Kouwenberg & Olivia Mitchell & Kim Peijnenburg, 2015. "Estimating ambiguity preferences and perceptions in multiple prior models: Evidence from the field," Journal of Risk and Uncertainty, Springer, vol. 51(3), pages 219-244, December.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading


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