Ambiguity and Disclosure in The Principal-Agent Model

The literature discusses risk aversion as one of the behavioral determinants of technology adoption. However, little attention has been paid to measuring ambiguity aversion of poor people in developing countries or in finding the role of ambiguity aversion in technology adoption. Risk experiments in the previous studies have been designed in such a way that individuals face the risky and/or ambiguous situations alone. Individuals in the real world, especially farmers in developing countries, are likely to get information from peers before making any decision regarding a new innovation that has an ambiguous nature. This paper addresses two broad issues. The first issue is to measure the risk and ambiguity preferences of Bangladeshi rural farmers. The paper investigates whether the attitudes toward uncertainty (risk and ambiguity) differ when farmers face the uncertainty alone versus when they are allowed to communicate with peer groups of 3 or 6. It also investigates whether farmers’ demographic characteristics affect their attitudes toward uncertainty or not. A second issue is to find whether measures of attitudes toward uncertainty is same across different groups of subjects using experimental lotteries. To do so, this paper replicates the same experiments with groups of students in two universities in Bangladesh. Finally, the paper also investigates whether demographic variables affect the attitudes toward risk and ambiguity aversion or not. It finds that risk attitudes of farmers and students are same when deciding alone. However, farmers tend to show higher variation in risk aversion than students sample when deciding in a group of 3. In the latter case, farmers tend to show less risk aversion than students. While disaggregating the measured risk attitudes across gender, female students tend to show more risk aversion as well as higher variation in risk aversion than male students in the sample. The study also finds that The study also finds that students’ and farmers’ demographic characteristics affect both risk and ambiguity aversion.

An Empirical Analysis of the Role of Risk Aversion in Executive Compensation Contracts

Designing efficient bidding strategies for sequential auctions represents an important, open problem area in agent-mediated electronic markets. In existing literature, a variety of bidding strategies have been proposed and have been shown to perform with varying degrees of efficiency. However, most of strategies proposed so far do not explicitly model bidders' attitudes towards risk which, in mainstream economic literature, is considered an essential attribute in modeling agent preferences and decision making under uncertainty. This paper studies the effect that risk profiles (modeled through the standard Arrow-Pratt risk aversion measure), have on the bidders' strategies in sequential auctions. First, the sequential decision process involved in bidding is modeled as a Markov Decision Process. Then, the effect that a bidder's risk aversion has on her decision theoretic optimal bidding policy is analyzed, for a category of expectations of future price distributions. This analysis is performed separately for the case of first price and second-price sequential auctions. Next, the bidding strategies developed above are simulated, in order to study the effect that an agent's risk aversion has on the chances of winning a set of complementary-valued items. The paper concludes with an experimental study of how the presence of risk-averse bidders affects both bidder profits and auctioneer revenue, for different market scenarios of increasing complexity.

Ambiguity and Beliefs in the Principal-Agent Model

Tournaments as a response to ambiguity aversion in incentive contracts

Is ambiguity aversion bad for innovation?

This paper demonstrates gender differences in risk aversion and ambiguity aversion. It also contributes to a growing literature relating economic preference parameters to psychological measures by asking whether variations in preference parameters among persons, and in particular across genders, can be accounted for by differences in personality traits and traits of cognition. Women are more risk averse than men. Over an initial range, women require no further compensation for the introduction of ambiguity but men do. At greater levels of ambiguity, women have the same marginal distaste for increased ambiguity as men. Psychological variables account for some of the interpersonal variation in risk aversion. They explain none of the differences in ambiguity.

The roles of risk and ambiguity in technology adoption

Ambiguity aversion–the tendency to avoid options whose outcome probabilities are unknown—is a ubiquitous phenomenon. While in some cases ambiguity aversion is an adaptive strategy, in many situations it leads to suboptimal decisions, as illustrated by the famous Ellsberg Paradox. Behavioral interventions for reducing ambiguity aversion should therefore be of substantial practical value. Here we test a simple intervention, aimed at reducing ambiguity aversion in an experimental design, where aversion to ambiguity leads to reduced earnings. Participants made a series of choices between a reference lottery with a 50% chance of winning $5, and another lottery, which offered more money, but whose outcome probability was either lower than 50% (risky lottery) or not fully known (ambiguous lottery). Similar to previous studies, participants exhibited both risk and ambiguity aversion in their choices. They then went through one of three interventions. Two groups of participants learned about the Ellsberg Paradox and their own suboptimal choices, either by actively calculating the objective winning probability of the ambiguous lotteries, or by observing these calculations. A control group learned about base-rate neglect, which was irrelevant to the task. Following the intervention, participants again made a series of choices under risk and ambiguity. Participants who learned about the Ellsberg Paradox were more tolerant of ambiguity, yet ambiguity aversion was not completely abolished. At the same time, these participants also exhibited reduced aversion to risk, suggesting inappropriate generalization of learning to an irrelevant decision domain. Our results highlight the challenge for behavioral interventions: generating a strong, yet specific, behavioral change.

Effects of communication, group selection, and social learning on risk and ambiguity attitudes: Experimental evidence from Bangladesh

We propose a new modeling framework to study the asset pricing implications of learning under ambiguity aversion. In a continuous time partial information Lucas economy, we characterize analytically equilibrium equity returns and make the following observations. First, learning under ambiguity aversion implies an equilibrium discount for ambiguity, if and only if relative risk aversion is below one or, equivalently, the elasticity of intertemporal substitution (EIS) is above one. In this case, ambiguity aversion increases conditional equity premia and volatilities. Second, equilibrium interest rates are lower, irrespective of risk aversion. Third, no time-invariant relation between excess returns and conditional variances exists. Therefore, estimated relations between excess returns and equity conditional variances are highly time varying and have an indeterminate sign. Fourth, estimates of the EIS based on standard Euler equations for equity returns are strongly downward biased in a setting of learning and ambiguity aversion. Therefore, an EIS well above one can be consistent with estimates of EIS well below one. Fifth, ambiguity does not resolve asymptotically. Finally, using realistic model parameters, we show that a low risk aversion and a moderate amount of ambiguity are consistent with the equity premium, the low interest rate, and the excess volatility puzzles.

Nepalese forestry professional's attitudes towards risk and uncertainty in adaptation decisions

We formulate the portfolio choice problem as a robust control problem under uncertainty or ambiguity aversion. By considering a stochastic investment opportunity set, we derive optimal robust portfolio rules in the cases of one and two risky assets. With two risky assets and ambiguity structure determined by economy-wide factors, we show that the robust portfolio rule could lead to an increase in the total holdings of risky assets as compared to the holdings under the Merton rule, which is the standard risk aversion case. This result goes against the general belief that uncertainty aversion and robust control methods lead to conservative behavior. We also show that the investor is more likely to increase the holdings of the asset for which there is no ambiguity, and reduce the holdings of the asset for which there is ambiguity, a result that might provide an explanation for the home bias puzzle.

Risk, Uncertainty and Entrepreneurship: Evidence from a Lab-in-the-Field Experiment

Risk, Uncertainty and Entrepreneurship: Evidence from a Lab-in-The-Field Experiment