Ambiguity Attitudes in a Large Representative Sample

Abstract

Using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes, we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample. In addition to ambiguity aversion, we confirm an ambiguity component recently found in laboratory studies: a insensitivity – the tendency to treat subjective likelihoods as fifty-fifty, thus overweighting extreme events. Our ambiguity measurements are associated with real economic decisions; specifically, a insensitivity is negatively related to stock market participation. Ambiguity aversion is also negatively related to stock market participation, but only for subjects who perceive stock returns as highly ambiguous.

Keywords: Ambiguity aversion, Uncertainty, Portfolio choice, Knightian uncertainty, Non-Expected utility, Reference dependence, Stock market participation, Limited participation

JEL Classification: D81, G11, D14, C83