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Experimental Evidence on Valuation and Learning with Multiple Priors

  • Qiu, Jianying
  • Weitzel, Utz

Abstract Popular models for decision making under ambiguity assume that people use not one but multiple priors. This paper is a first attempt to experimentally elicit multiple priors. In an ambiguous scenario with two underlying states we measure a subject’s single prior, her other potential priors (multiple priors), her confidence in these priors valuation of an ambiguous asset with the same underlying states. We also investigate subjects' updating of (multiple) priors after receiving signals about the true states. We find that single priors are best understood as a confidence-weighted average of multiple priors. Single priors also predict the valuation of ambiguous assets best, while both the minimum and maximum of subjects' multiple priors add explanatory power. This provides some but no exclusive support for the maxmin (Gilboa and Schmeidler, 1989) and the alpha maxmin model (Ghirardato et al., 2004). With regard to updating of priors, we do not observe strong deviations from Bayesian learning, although subjects overadjust/underadjust their priors and their confidence in multiple priors after a contradictory/confirming signal. Subjects also react to neutral information with more confidence in their priors. This holds under ambiguity, but not in a comparison treatment under risk.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43974.

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Date of creation: 24 Jan 2013
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Handle: RePEc:pra:mprapa:43974
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  1. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  2. Epstein Larry G & Noor Jawwad & Sandroni Alvaro, 2010. "Non-Bayesian Learning," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-20, January.
  3. Massimo Guidolin & Francesca Rinaldi, 2009. "A simple model of trading and pricing risky assets under ambiguity: any lessons for policy-makers?," Working Papers 2009-020, Federal Reserve Bank of St. Louis.
  4. Bryan R. Routledge, Stanley E. Zin, 2000. "Model Uncertainity And Liquidity," Computing in Economics and Finance 2000 368, Society for Computational Economics.
  5. repec:lmu:muenar:20868 is not listed on IDEAS
  6. Robert F. Nau, 2006. "Uncertainty Aversion with Second-Order Utilities and Probabilities," Management Science, INFORMS, vol. 52(1), pages 136-145, January.
  7. Larry Epstein & Martin Schneider, 2005. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 519, University of Rochester - Center for Economic Research (RCER).
  8. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2006. "Ambiguity in Asset Markets: Theory and Experiment," Carlo Alberto Notebooks 27, Collegio Carlo Alberto, revised 2009.
  9. Massimo Marinacci, 2002. "Learning from ambiguous urns," Statistical Papers, Springer, vol. 43(1), pages 143-151, January.
  10. Jianying Qiu & Eva-Maria Steiger, 2010. "Understanding the Two Components of Risk Attitudes: An Experimental Analysis," Jena Economic Research Papers 2010-053, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  11. Kyoungwon Seo, 2009. "Ambiguity and Second-Order Belief," Econometrica, Econometric Society, vol. 77(5), pages 1575-1605, 09.
  12. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  13. Trautmann, S.T. & van de Kuilen, G., 2011. "Belief Elicitation : A Horse Race among Truth Serums," Discussion Paper 2011-117, Tilburg University, Center for Economic Research.
  14. John D Hey & Gianna Lotito & Anna Maffioletti, 2008. "The Descriptive and Predictive Adequacy of Theories of Decision Making Under Uncertainty/Ambiguity," Discussion Papers 08/04, Department of Economics, University of York.
  15. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
  16. Philipp Karl Illeditsch, 2011. "Ambiguous Information, Portfolio Inertia, and Excess Volatility," Journal of Finance, American Finance Association, vol. 66(6), pages 2213-2247, December.
  17. Larry G. Epstein & Martin Schneider, 2001. "Recursive Multiple-Priors," RCER Working Papers 485, University of Rochester - Center for Economic Research (RCER).
  18. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
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