Ambiguity Aversion, Malevolent Nature and Unforeseen Contingencies

University Of Minnesota-Twin Cities, Minneapolis MN

Investigators

Abstract

An investor who is considering the purchase of an asset and is evaluating the comparative merits of investing in an American firm versus a firm in Signapore may be inclined to prefer the first, all other things being equal. This is an example of "ambiguity aversion"; even when the financial returns from the two investments are identical, many people will prefer the more familar investment. Recent reseach in empirical and experimental economics has demonstrated that ambiguity aversion appears in many contexts. The standard microeconomic model of decisionmaking under uncertainty cannot explain these results. The PI plans a research program to develop a consistent and tractable model of ambiguity aversion that will combine the various explanations advanced by other scholars into a single framwork. He will then develop testable implications of the model. The goal is to determine whether ambiguity aversion is caused by a desire to eliminate unforseen contingencies, or by a desire to choose the optimal response to the possibility that the worst outcome will occur. This research will lead to a better understanding of how individuals make a wide variety of decisions about investments, saving, and insurance.