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Experimental Evidence on Valuation and Learning with Multiple Priors

Listed author(s):
  • 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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File URL: https://mpra.ub.uni-muenchen.de/43974/1/MPRA_paper_43974.pdf
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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
Handle: RePEc:pra:mprapa:43974
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  1. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
  2. 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.
  3. Kyoungwon Seo, 2009. "Ambiguity and Second-Order Belief," Econometrica, Econometric Society, vol. 77(5), pages 1575-1605, 09.
  4. 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.
  5. 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.
  6. 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.
  7. Stefan T. Trautmann & Gijs Kuilen, 2015. "Belief Elicitation: A Horse Race among Truth Serums," Economic Journal, Royal Economic Society, vol. 125(589), pages 2116-2135, December.
  8. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
  9. Bryan R. Routledge, Stanley E. Zin, 2000. "Model Uncertainity And Liquidity," Computing in Economics and Finance 2000 368, Society for Computational Economics.
  10. Robert F. Nau, 2006. "Uncertainty Aversion with Second-Order Utilities and Probabilities," Management Science, INFORMS, vol. 52(1), pages 136-145, January.
  11. Larry G. Epstein & Martin Schneider, 2008. "Ambiguity, Information Quality, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 197-228, 02.
  12. 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.
  13. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  14. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
  15. Massimo Marinacci, 2002. "Learning from ambiguous urns," Statistical Papers, Springer, vol. 43(1), pages 143-151, January.
  16. repec:lmu:muenar:20868 is not listed on IDEAS
  17. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  18. Philipp Karl Illeditsch, 2011. "Ambiguous Information, Portfolio Inertia, and Excess Volatility," Journal of Finance, American Finance Association, vol. 66(6), pages 2213-2247, December.
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