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Open Access
Article
Publication date: 14 September 2022

Jimin Hong

This study investigates insurance demand in a two-period model when a decision-maker (DM) is averse to the ambiguity of loss distributions. This study derives sufficient…

Abstract

This study investigates insurance demand in a two-period model when a decision-maker (DM) is averse to the ambiguity of loss distributions. This study derives sufficient conditions such that the ambiguity-averse DM purchases more insurance than an ambiguity-neutral one when the DM maximises the expected utility. It also derives each sufficient condition to increase insurance demand as ambiguity aversion, ambiguity and downside ambiguity increase, respectively.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 30 no. 4
Type: Research Article
ISSN: 1229-988X

Keywords

Article
Publication date: 23 July 2020

Bryan Foltice and Rachel Rogers

This paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.

Abstract

Purpose

This paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.

Design/methodology/approach

We evaluate 221 undergraduate students in the US and first assess the degree of ambiguity aversion exhibited by individuals in the sample population as they decide between a risky (known probability) option and ambiguous (unknown probability) option pertaining to their chances of winning $0 or $1 in a hypothetical lottery. Similarly, we test whether sampling historical return data through learning modules influences long-term decision making regarding asset allocation within a retirement portfolio.

Findings

Allowing participants to experience the underlying probability through sampling significantly influences behavior, as participants were more likely to select the ambiguous option after sampling. Here, we also find that participants who receive interactive learning modules – which require users to manually alter the asset allocation to produce a sample of historical return data based on the specific allocation entered in the model – increase their post-learning equity allocations by 10.1% more than individuals receiving static modules. Interestingly, we find no significant evidence of ambiguity aversion playing a role in the asset allocation decision.

Originality/value

We find that decision-making related to ambiguous and risky options can be substantially influenced by experiential learning. Our study supplements previous literature, providing a link between research on the effect of ambiguity on stock market participation and implementation of educational programs to improve the asset allocation decision for young adults.

Details

Review of Behavioral Finance, vol. 13 no. 4
Type: Research Article
ISSN: 1940-5979

Keywords

Book part
Publication date: 1 December 2008

Soo Hong Chew, King King Li, Robin Chark and Songfa Zhong

Purpose – This experimental economics study using brain imaging techniques investigates the risk-ambiguity distinction in relation to the source preference hypothesis (Fox…

Abstract

Purpose – This experimental economics study using brain imaging techniques investigates the risk-ambiguity distinction in relation to the source preference hypothesis (Fox & Tversky, 1995) in which identically distributed risks arising from different sources of uncertainty may engender distinct preferences for the same decision maker, contrary to classical economic thinking. The use of brain imaging enables sharper testing of the implications of different models of decision-making including Chew and Sagi's (2008) axiomatization of source preference.

Methodology/approach – Using fMRI, brain activations were observed when subjects make 48 sequential binary choices among even-chance lotteries based on whether the trailing digits of a number of stock prices at market closing would be odd or even. Subsequently, subjects rate familiarity of the stock symbols.

Findings – When contrasting brain activation from more familiar sources with those from less familiar ones, regions appearing to be more active include the putamen, medial frontal cortex, and superior temporal gyrus. ROI analysis showed that the activation patterns in the familiar–unfamiliar and unfamiliar–familiar contrasts are similar to those in the risk–ambiguity and ambiguity–risk contrasts reported by Hsu et al. (2005). This supports the conjecture that the risk-ambiguity distinction can be subsumed by the source preference hypothesis.

Research limitations/implications – Our odd–even design has the advantage of inducing the same “unambiguous” probability of half for each subject in each binary comparison. Our finding supports the implications of the Chew–Sagi model and rejects models based on global probabilistic sophistication, including rank-dependent models derived from non-additive probabilities, e.g., Choquet expected utility and cumulative prospect theory, as well as those based on multiple priors, e.g., α-maxmin. The finding in Hsu et al. (2005) that orbitofrontal cortex lesion patients display neither ambiguity aversion nor risk aversion offers further support to the Chew–Sagi model. Our finding also supports the Levy et al. (2007) contention of a single valuation system encompassing risk and ambiguity aversion.

Originality/value of chapter – This is the first neuroimaging study of the source preference hypothesis using a design which can discriminate among decision models ranging from risk-based ones to those relying on multiple priors.

Details

Neuroeconomics
Type: Book
ISBN: 978-1-84855-304-0

Article
Publication date: 27 May 2021

Nuno Silva

The study aims to show that ambiguity aversion exerts a non-negligible effect on the investors' decisions, especially due to the possibility of sharp declines in stock prices.

Abstract

Purpose

The study aims to show that ambiguity aversion exerts a non-negligible effect on the investors' decisions, especially due to the possibility of sharp declines in stock prices.

Design/methodology/approach

The vast majority of previous studies on life-cycle consumption and asset allocation assume that the equity premium is constant. This study evaluates the impact of rare disasters that shift the stock market to a low return state on investors' consumption and portfolio decisions. The author assumes that investors are averse to ambiguity relative to the current state of the economy and must incur a per period cost to participate in the stock market and solve their optimal consumption and asset allocation problem using dynamic programming.

Findings

The results show that most young investors choose not to invest in stocks because they have low accumulated wealth and the potential return from their stock market investments would not cover the participation costs. Furthermore, ambiguity-averse investors hold considerably fewer stocks throughout their lifetime than ambiguity-neutral ones. The fraction of wealth invested in stocks over the typical consumer's life is hump-shaped: it is low for a young individual, peaks at his early 30s and then decreases until his retirement age.

Originality/value

To the best of the author’s knowledge, this is the first study that assesses the impact of negative stock price jumps on the optimal portfolio of an ambiguity-averse investor.

Details

Review of Behavioral Finance, vol. 14 no. 5
Type: Research Article
ISSN: 1940-5979

Keywords

Book part
Publication date: 22 August 2014

Alisa G. Brink, Eric Gooden and Meha Kohli Mishra

There has been much discussion regarding the necessity of moving away from precise (rules-based) standards toward less precise (principles-based) standards. This study…

Abstract

There has been much discussion regarding the necessity of moving away from precise (rules-based) standards toward less precise (principles-based) standards. This study examines the impact of the proposed shift by using a controlled experiment to evaluate the influence of rule precision and information ambiguity on reporting decisions in the presence of monetary incentives to report aggressively. Using motivated reasoning theory as a framework, we predict that the malleability inherent in both rule precision and information ambiguity amplify biased reasoning in a manner that is consistent with individuals’ pecuniary incentives. In contrast, consistent with research exploring ambiguity aversion we predict that high levels of ambiguity will actually attenuate aggressive reporting. Our results support these predictions. Specifically, we find an interactive effect between rule precision and information ambiguity on self-interested reporting decisions at moderate levels of ambiguity. However, consistent with ambiguity aversion, we find decreased self-interested reporting decisions at high levels of ambiguity relative to moderate ambiguity. This study should be of interest to preparers, auditors, and regulators who are interested in identifying situations which amplify and diminish aggressive reporting.

Details

Advances in Accounting Behavioral Research
Type: Book
ISBN: 978-1-78350-445-9

Keywords

Article
Publication date: 17 June 2021

Divya Aggarwal, Uday Damodaran, Pitabas Mohanty and D. Israel

This study examines individual ambiguity attitudes alone and in groups by leveraging the descriptive model of anchoring and adjustment on decision-making under ambiguity

Abstract

Purpose

This study examines individual ambiguity attitudes alone and in groups by leveraging the descriptive model of anchoring and adjustment on decision-making under ambiguity. The study extends Ellsberg's probability ambiguity to outcome ambiguity and examines decisions made under both ambiguities, at different likelihood levels and under the domain of gains and losses.

Design/methodology/approach

The methodology selected for this study is a two-stage within-subject lab experiment, with participants from different Indian universities. Each participant made 12 lottery decisions at the individual level and at individuals in the group level.

Findings

The results show that ambiguity attitudes are not universal in nature. Ambiguity seeking as a dominant choice was observed at both the individual level and at individual in the group level. However, the magnitude of ambiguity seeking or ambiguity aversion contingent upon the domain of gains and losses differed widely across the individual level and at individuals in the group level.

Research limitations/implications

The study enables to contribute toward giving a robust descriptive explanation for individual behavior in real-world applications of finance. It aims to provide direction for theoretical normative models to accommodate heterogeneity of ambiguity attitudes.

Originality/value

The study is novel as it examines a two-dimensional approach by representing ambiguity in probability and in outcomes. It also analyzes whether decisions under ambiguity vary when individuals make decisions alone and when they make it in groups.

Details

Review of Behavioral Finance, vol. 14 no. 5
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 16 May 2016

Yuandong Xu

The empirical studies have indicated that the information uncertainty is one of the reasons leading to the momentum effect in the stock market. Based on this conclusion…

Abstract

Purpose

The empirical studies have indicated that the information uncertainty is one of the reasons leading to the momentum effect in the stock market. Based on this conclusion, the concept of “information uncertainty” is deepened into the concept hierarchy of “information ambiguity,” the purpose of this paper is to explain the momentum effect in the China’s stock market from information ambiguity.

Design/methodology/approach

Based on the information ambiguity, the paper puts forward two hypotheses, portfolio analysis and cross-sectional regression analysis method were used to empirically test these hypothesis based on the weekly data.

Findings

The empirical results support the two hypotheses.

Originality/value

Finally, the paper discusses the importance from ambiguity to understand financial anomalies, such as momentum effect.

Details

China Finance Review International, vol. 6 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 1 November 2018

Yanping Gong, Wei Hou, Qin Zhang and Shuang Tian

Decision theory holds that the ambiguity of decision information affects the choices of decision makers, who have the emotion of “ambiguity aversion” when making fuzzy…

Abstract

Purpose

Decision theory holds that the ambiguity of decision information affects the choices of decision makers, who have the emotion of “ambiguity aversion” when making fuzzy decisions. The purpose of this paper is to explore the neural mechanism how the information ambiguity of different sales promotion strategies influences consumers’ purchasing decision.

Design/methodology/approach

The paper uses the event-related potential (ERP) technique and experiment.

Findings

Results indicate that the information ambiguity of sales promotion strategies did influence the purchasing decision of consumers, and there were significant differences in the amplitudes of brain wave P2, N2 and P3 when consumers encountered the sales promotions of different types (discounts and gift-giving). This reflects the difference in perceived risk, decision-making conflict and decision-making attitude. It means that compared with discounts, the perceived risk and difficulty increased while the decision-making confidence plunged when consumers were faced with gift-giving promotions. This finding gives an explanation on the neural level why consumers prefer discounts, rather gift-giving sales promotions.

Practical implications

For the merchants to promote commodities online, it is suggested that the actual benefit from the sales promotion should be specified to reduce the ambiguity of sales promotion information. As the neuromarketing develops, merchants have obtained more effective approaches to study marketing strategies.

Originality/value

One of the theoretical contributions this paper made is that the authors innovatively explored the consumer’s preference to online sales promotion strategies from the perspective of fuzzy decision. Second, the authors adopted the ERP technique to study the influence of the ambiguity of sales promotion information on the consumer’s purchasing behaviors. Third, this study provides an explanation for why consumers prefer the sales promotion type of discounts according to the neural mechanism of decision making.

Details

Journal of Contemporary Marketing Science, vol. 1 no. 1
Type: Research Article
ISSN: 2516-7480

Keywords

Book part
Publication date: 3 June 2008

Glenn W. Harrison and E. Elisabet Rutström

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the…

Abstract

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments.

Details

Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

Article
Publication date: 5 May 2015

Michael Carter, Ghada Elabed and Elena Serfilippi

While behavioral economic experiments have uncovered a wealth of insights concerning how people decide in the face of risk and uncertainty, the implications of these…

Abstract

Purpose

While behavioral economic experiments have uncovered a wealth of insights concerning how people decide in the face of risk and uncertainty, the implications of these insights for the demand for agricultural insurance are under-explored. The purpose of this paper is to report on results from two recent field experiments that measure the extent to which farmer behavior departs from the predictions of expected utility theory and derives the implications of these departures for insurance demand.

Design/methodology/approach

Framed behavioral field experiments were played with random samples of West African Cotton farmers who lived in areas that were being incorporated into a cotton insurance pilot program.

Findings

Substantial numbers of farmers depart from expected utility behavior in ways that predict excess sensitivity to uncovered basis risk in insurance contracts; and, the fact that insurance premiums are typically framed as certain and unavoidable, while benefits are unknown and stochastic.

Originality/value

Using novel field experimental methods, the work summarized here indicates that more careful design of index insurance contracts in conformity with the findings of behavioral economics could result in larger contract uptake and, ultimately, larger development impacts.

Details

Agricultural Finance Review, vol. 75 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

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