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Ravanelli, Claudia and Svindland, Gregor (2019): Ambiguity sensitive preferences in Ellsberg frameworks. In: Economic Theory, Vol. 67, No. 1: pp. 53-89

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Abstract

We study the market implications of ambiguity sensitive preferences using the -maxmin expected utility (-MEU) model. In the standard Ellsberg framework, we prove that -MEU preferences are equivalent to either maxmin, maxmax or subjective expected utility (SEU). We show how ambiguity aversion impacts equilibrium asset prices, and revisit the laboratory experimental findings inBossaerts et al. (Rev Financ Stud 23:1325-1359, 2010). Only when there are three or more ambiguous states, -MEU, maxmin, maxmax and SEU models induce different portfolio choices. We suggest criteria to discriminate among these models in laboratory experiments and show that ambiguity seeking agents may prevent the existence of market equilibrium. Our results indicate that ambiguity matters for portfolio choice and does not wash out in equilibrium.

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