Ambiguity Attitudes in a Large Representative Sample: Measurement and an Application to the Non-Participation Puzzle

Abstract:     
In a large representative sample, we measure ambiguity attitudes and investigate their relation with stock market participation. Our tractable measurement of the general population’s ambiguity attitudes is made possible by a simplification of the recently introduced source method. In addition to ambiguity aversion, the results from our representative sample confirm a-insensitivity, a new component of ambiguity attitudes recently found in laboratory studies. A-insensitivity means that people do not sufficiently discriminate between different levels of likelihood, often treating them as fifty-fifty. Contrary to common expectation, ambiguity aversion, when measured using classical stimuli, is not significantly associated with stock market participation, except for those subjects who perceive stock returns as highly ambiguous. A-insensitivity, however, is negatively related to both stock market participation and private business ownership. These surprising findings can be explained by reference dependent ambiguity. Our results show the empirical relevance of a-insensitivity and reference dependence for real-world economic decisions.

Number of Pages in PDF File: 71

Keywords: Ambiguity Aversion, Uncertainty, Portfolio Choice, Knightian Uncertainty, Non-Expected Utility, Reference Dependence, Stock Market Participation, Limited Participation

JEL Classification: D81, G11, D14, C83

working papers series