Is ambiguity aversion bad for innovation?

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.

Tournaments as a response to ambiguity aversion in incentive contracts

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.

The roles of risk and ambiguity in technology adoption

Ambiguity and Disclosure in The Principal-Agent Model

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.

Uncertain dynamics, correlation effects, and robust investment decisions

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

The primary purpose of the research is to develop new scientific approaches to the implementation of joint innovation and investment projects in the framework of cooperation between developing countries on the example of the Republic of Kazakhstan and the Russian Federation. The methodology of the study included the use of a system of methods: the analytical and induction methods, hypothesis and the synthesis method. As part of the analytical and induction methods, the general theory of investment projects implemented by business entities of two or more countries was investigated. When considering the theory of investment and innovation projects, the following aspects were studied: basic fundamental attributes of project implementation; modelling of investment and innovation projects; modelling of the development of cross-country investment and innovation projects with the participation of two or more countries; factors influencing the effectiveness of cross-country investment and innovation projects. The study focused on the impact of investment and innovation projects on the economic growth of developing countries. Based on the results obtained using the analytical method, the general problems of intensification of investment projects were developed. Based on the identified problems, the method of hypothesis formulation was applied, which allowed formulating postulates on the application of several new methods of integration and economic cooperation of the states. The findings of the research allow in developing a new economic policy of cooperation of developing and, in some aspects, developed countries and applying it in practice in the conditions of increasing global competition.

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.

Introduction. Improving the quality of medical services and raising the effectiveness of the operation of the subjects of the medical system of Ukraine requires intensifying innovation, which needs significant investments. So, the application of qualitative methods for analyzing the efficiency of such projects is of great importance.Problem Statement. Scholarly research and methodological framework and practical recommendations deal with the identification of problem areas and aspects of the implementation of innovation and investment projects at healthcare institutions in Ukraine.Purpose. The purpose is to comprehensively analyze and to identify the problematic aspects of the implementation of innovation and investment projects by healthcare institutions and to determine the measures to address them as well as to increase the effectiveness of the innovation. Material and Methods. In the course of the study, the method of economic and mathematical modeling has been used to perform a composite analysis (using the weighted average method) of the effectiveness of the implementation of innovation and investment projects by the example of healthcare institutions.Results. It has been established that the efficiency of the implementation of innovation and investment projects at healthcare institutions of Ukraine is satisfactory, but such components as the financial and economic sustainability of the project and the quality of intellectual and personnel support, especially the structure of investments and their profitability, staff turnover and the level of professional qualification of medical personnel remain problematic. Financial and economic stability and investment andmarketing development remain the most problematic components of the efficiency.Conclusions. One of the key signs of the efficiency of investment and innovation projects in medicine is their systematic manner that involves a combination of measures to activate and develop investment and innovation in the organizational and institutional (1), the economic (2), the product and service (3), the social and psychological (4) components.

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.

This paper offers an ambiguity-based interpretation of the variance premium — the difference between risk-neutral and objective expectations of market return variance — as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our calibrated model can match the variance premium, the equity premium, and the risk-free rate in the data. We find that about 97% of the mean–variance premium can be attributed to ambiguity aversion. A three-way separation among ambiguity aversion, risk aversion, and intertemporal substitution, permitted by the smooth ambiguity preferences, plays a key role in our model’s quantitative performance.

The first paper of this dissertation in Chapter II, “Insurance for Technology Adoption: An Experimental Evaluation of Schemes and Subsidies with Maize Farmers in Mexico”, analyzes experimentally how bundling the purchase of a risky technology, namely a higher yielding maize seed variety, with different insurance schemes, affects the total take-up of that variety. In this regard, the paper looks at the effects of (1) partial insurance versus full insurance, (2) geographical versus local basis risk, and (3) fair versus below-fair premium. This is the first paper to evaluate insurance schemes with different levels of risk reduction, basis risk and premium subsidies regarding their effect on technology adoption. The results add to the debate on insurance serving as a potential tool for incentivizing agricultural producers to adopt more productive, but more risky technologies, and thereby enabling them to escape poverty (Carter et al. 2016; Fan et al. 2013; Lybbert and Carter 2014; Nicola 2015; World Bank 2013). The second paper in Chapter III, “The Relationship between Farmers’ Shock Experiences and their Uncertainty Preferences - Experimental Evidence from Mexico” addresses the relationship between farmers’ uncertainty preferences, sociodemographic characteristics and their experience of adverse harvest shocks. Uncertainty preferences refer to a range of preference parameters as derived from Cumulative Prospect Theory (Kahneman and Tversky 1979; Tversky and Kahneman 1992), namely risk aversion, loss aversion and probability weighting, as well as ambiguity aversion (Ellsberg 1961). A series of incentivized lottery games are used to estimate these parameters with the sample of Mexican maize farmers, controlling for (1) sociodemographic characteristics and (2) the severity of experienced maize harvest losses. While there are several field studies examining the effect of shocks on risk preferences with subjects from developing countries, only few look at preferences beyond Expected Utility Theory and take into account Cumulative Prospect Theory, and none has looked at ambiguity aversion. Therefore, this paper sheds light on the role that the experience of adverse random shocks, as well as a range of sociodemographic variables, have in explaining one’s uncertainty preferences. The third paper in Chapter IV, “Formal Insurance, Risk Sharing, and the Dynamics of Other-Regarding Preferences”, analyzes how selectively providing formal insurance to members of a risk sharing network affects informal transfers and, subsequently, the dynamics of other-regarding preferences within that network. Many poor households in developing countries are excluded from formal financial markets and therefore rely on the mutual exchange within informal risk sharing networks to protect themselves against adverse income shocks. Social interactions in the aftermath of such shocks have been found to strengthen the social ties among members of these networks, while formal insurance has been found to crowd-out these transfers. Similarly, this third paper finds that when some members of risk sharing networks become formally insured, it affects the informal exchange of transfers among members, as well as their other-regarding preferences. This is the first study to explore the effect of insurance on other-regarding preferences in that context. In order to do so, an incentivized, three-stage experimental design with a baseline and an ex-post measurement of altruism, trust and trustworthiness through dictator and trust games is implemented with random and anonymous groups of three. Between the baseline and the ex-post measurement, a solidarity game is played with the same anonymous groups as in the ex-post measurement of other-regarding preferences, during which the shock structure and the availability of formal insurance are varied exogenously. The findings suggest that the effect of insurance depends on (1) the covariance structure of shocks and (2) is different for the insured and non-insured members within a network. Insurance either decreases trust levels of the uninsured or increases trust levels of the insured subjects towards the other network members, depending on whether the shocks affects one or more than one network member at a time. Trustworthiness and altruism remain unaffected by insurance. Furthermore, the analysis indicates that the results are driven by a change in the dynamics of the transfer behavior within the network induced by formal insurance. Specifically, there is evidence that subjects increase trust levels towards their network members after receiving higher transfers relative to the maximum possible value from them, but not after receiving higher transfers in absolute terms.