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

  • Paul Viefers
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    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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    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
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    Handle: RePEc:diw:diwwpp:dp1228
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    25. Epstein Larry G. & Le Breton Michel, 1993. "Dynamically Consistent Beliefs Must Be Bayesian," Journal of Economic Theory, Elsevier, vol. 61(1), pages 1-22, October.
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    27. Riedel, Frank, 2010. "Optimal Stopping under Ambiguity in Continuous Time," Center for Mathematical Economics Working Papers 429, Center for Mathematical Economics, Bielefeld University.
    28. Takao Asano & Hiroko Okudaira & Masaru Sasaki, 2011. "An Experimental Test of a Search Model under Knightian Uncertainty," Discussion Papers in Economics and Business 11-05, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
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