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

Author

Listed:
  • Sujoy Mukerji
  • Jean-Marc Tallon
  • CNRS-EUREQua
  • Universite Paris I

Abstract

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 & CNRS-EUREQua & Universite Paris I, 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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    File URL: https://ora.ox.ac.uk/objects/uuid:72c76002-1f0c-441c-8d8f-6da4e61a6cd6
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Epstein, Larry G., 2000. "Are Probabilities Used in Markets ?," Journal of Economic Theory, Elsevier, vol. 91(1), pages 86-90, March.
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    7. Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
    8. 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.
    9. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
    10. 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.
    11. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
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    Cited by:

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

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    More about this item

    Keywords

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

    JEL classification:

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

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