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Ellsberg`s 2-Color Experiment, Bid-Ask Behavior and Ambiguity


  • Sujoy Mukerji
  • Jean-Marc Tallon


Results in this note relate the observation of an interval of prices at which a DM strictly prefers to hold a zero position on an asset (termed `bid-ask behavior`) to the DM`s perception of the underlying payoff relevant events as ambiguous, as the term is defined in Epstein and Zhang (2001). The connection between bid-ask behavior and ambiguity is established without invoking a parametric preference form, such as the Choquet expected utility or the max-min multiple priors model. This allows us to draw an observable distinction between bid-ask behavior that may arise purely due to first-order risk aversion type effects, such as those which could arise even if preferences were probabilistically sophisticated, and the bid-ask behavior that involve ambiguity perceptions.

Suggested Citation

  • Sujoy Mukerji & Jean-Marc Tallon, 2002. "Ellsberg`s 2-Color Experiment, Bid-Ask Behavior and Ambiguity," Economics Series Working Papers 114, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:114

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    References listed on IDEAS

    1. Machina, Mark J, 2000. "Payoff Kinks in Preferences Over Lotteries," University of California at San Diego, Economics Working Paper Series qt7vn7d2hs, Department of Economics, UC San Diego.
    2. Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
    3. Epstein, Larry G., 2000. "Are Probabilities Used in Markets ?," Journal of Economic Theory, Elsevier, vol. 91(1), pages 86-90, March.
    4. Epstein Larry G. & Wang Tan, 1995. "Uncertainty, Risk-Neutral Measures and Security Price Booms and Crashes," Journal of Economic Theory, Elsevier, vol. 67(1), pages 40-82, October.
    5. Hong Chew Soo & Epstein Larry G. & Wakker Peter, 1993. "A Unifying Approach to Axiomatic Non-expected Utility Theories: Correction and Comment," Journal of Economic Theory, Elsevier, vol. 59(1), pages 183-188, February.
    6. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
    7. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-1231, December.
    8. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
    9. Epstein, Larry G & Zhang, Jiankang, 2001. "Subjective Probabilities on Subjectively Unambiguous Events," Econometrica, Econometric Society, vol. 69(2), pages 265-306, March.
    10. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    11. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
    12. Epstein, L.G. & Zhang, J., 1998. "Subjective Probabilities on Subjectivity Unambiguous Event," RCER Working Papers 456, University of Rochester - Center for Economic Research (RCER).
    13. Machina, Mark J, 2001. "Payoff Kinks in Preferences over Lotteries," Journal of Risk and Uncertainty, Springer, vol. 23(3), pages 207-260, November.
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    Cited by:

    1. Larry G. Epstein & Martin Schneider, 2007. "Learning Under Ambiguity," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1275-1303.

    More about this item


    Ellsberg Paradox; bid-ask spread; testing for ambiguity aversion; uncertainty aversion; unforeseen cointingencies; subjective state spaces.;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty


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