Ellsberg`s 2-Color Experiment, Bid-Ask Behavior and Ambiguity
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.
|Date of creation:||01 Jul 2002|
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- Larry G. Epstein & Jiankang Zhang, 1999.
"Subjective Probabilities on Subjectively Unambiguous Events,"
Carleton Economic Papers
99-18, Carleton University, Department of Economics.
- Epstein, Larry G & Zhang, Jiankang, 2001. "Subjective Probabilities on Subjectively Unambiguous Events," Econometrica, Econometric Society, vol. 69(2), pages 265-306, March.
- Machina, Mark J, 2001. " Payoff Kinks in Preferences over Lotteries," Journal of Risk and Uncertainty, Springer, vol. 23(3), pages 207-60, November.
- Epstein, L.G. & Zhang, J., 1998. "Subjective Probabilities on Subjectivity Unambiguous Event," RCER Working Papers 456, University of Rochester - Center for Economic Research (RCER).
- Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
- Mukerji, Sujoy, 1998.
"Ambiguity Aversion and Incompleteness of Contractual Form,"
American Economic Review,
American Economic Association, vol. 88(5), pages 1207-31, December.
- Mukerji, S., 1997. "Ambiguity aversion and incompleteness of contractual form," Discussion Paper Series In Economics And Econometrics 9715, Economics Division, School of Social Sciences, University of Southampton.
- Epstein, L.G., 1999.
"Are Probabilities Used in Markets?,"
RCER Working Papers
464, University of Rochester - Center for Economic Research (RCER).
- 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.
- Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
- 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.
- Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
- Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001.
"Representing Preferences with a Unique Subjective State Space,"
Econometric Society, vol. 69(4), pages 891-934, July.
- Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- 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.
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