Separating the Effects of Beliefs and Attitudes on Pricing under Ambiguity

43 Pages Posted: 10 Mar 2021 Last revised: 28 Oct 2021

See all articles by Wenhui Li

Wenhui Li

SAFE Goethe University Frankfurt

Christian Wilde

Goethe University Frankfurt - Department of Finance

Date Written: August 23, 2021

Abstract

The pricing of an ambiguous asset, whose cash flow stream is uncertain, may be affected by three factors: the belief regarding the realization likelihood of the cash flows, the subjective attitude towards risk, and the attitude towards ambiguity. While previous literature looks at the total price discount under ambiguity, this paper investigates with laboratory experiments how much price discount each factor can induce. We cleanly disentangle the price discount into three components: belief discount (ascribed to beliefs), risk discount (ascribed to risk aversion), and ambiguity discount (ascribed to ambiguity aversion). We find that under complete ambiguity, the ambiguity discount is the largest of the three components, and it is found to be around ten percent compared to neutrality. As information accumulates, the ambiguity discount decreases. We also find that beliefs do influence prices under ambiguity. In a parametric analysis, we provide estimates of the parameter of ambiguity aversion that are cleaner compared to previous studies, since the estimates are not confounded by beliefs.

Keywords: ambiguity, ambiguity attitude, belief, price discount, laboratory experiments

JEL Classification: D81, D83

Suggested Citation

Li, Wenhui and Wilde, Christian, Separating the Effects of Beliefs and Attitudes on Pricing under Ambiguity (August 23, 2021). SAFE Working Paper No. 311, Available at SSRN: https://ssrn.com/abstract=3801713 or http://dx.doi.org/10.2139/ssrn.3801713

Wenhui Li

SAFE Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt
Germany

Christian Wilde (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

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