Comparative Risk Aversion in the Presence of Ambiguity

Guetlein, Marie-Charlotte

doi:10.1257/mic.20150056

Cited by 4 publications

(4 citation statements)

References 16 publications

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“…However, as emphasized by Guetlein (2016), the smooth model does not offer a straightforward separation between ambiguity and risk attitudes. In particular, whether the agent is ambiguity averse or ambiguity lover depends on whether the ratio…”

Section: Monotone Preferencesmentioning

confidence: 99%

“…To avoid such shortcomings, Guetlein (2016) suggests considering a simultaneous increase in both risk and ambiguity aversion that leaves ambiguity attitudes unchanged (see Section III of her paper). In the general framework of Guetlein (2016), such joint increases can be rather complex, involving different transformations of the risk-aversion and ambiguity-aversion functions. Under the assumption of preference monotonicity considered in the current paper, the situation is, however, much simpler.…”

Section: Monotone Preferencesmentioning

confidence: 99%

“…Although these traits appear to have certain similarities, with both traits aiming to model attitudes towards (objective or subjective) uncertainty, they have generally been studied in two separate strands of the economic literature. As pointed out in Guetlein (2016), the reason for the lack of joint analysis is that doing this is complicated and may in general lead to nonclear-cut results. Some insights have been given in static setups for self-insurance and self-protection questions (see among others , Treich 2010;Snow 2011;Alary et al 2013), for the value of information (e.g., Hoy et al 2014), and for portfolio choice problems (see e.g., Dow and Werlang 1992;Gollier 2011).…”

Section: Introductionmentioning

confidence: 99%

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The impact of risk aversion and ambiguity aversion on annuity and saving choices

2022

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We analyze the impact of risk aversion and ambiguity aversion on the competing demands for annuities and bequeathable savings using a lifecycle recursive utility model. Our main finding is that risk aversion and ambiguity aversion have similar effects: an increase in either of the two reduces annuity demand and enhances bond holdings. We obtain this unequivocal result in the flexible intertemporal framework of Hayashi and Miao (2011) by assuming that the agent’s preferences are monotone with respect to first-order stochastic dominance. Our contribution is then twofold. First, from a decision-theoretic point of view, we show that monotonicity allows one to obtain clear-cut results about the respective roles of risk and ambiguity aversion. Second, from the insurance point of view, our result that the demand for annuities decreases with risk and ambiguity aversion stands in contrast with what is usually found with other insurance products. As such, it may help explain the low annuitization level observed in the data.

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Section: Monotone Preferencesmentioning

confidence: 99%

Section: Monotone Preferencesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The impact of risk aversion and ambiguity aversion on annuity and saving choices

2022

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“…According to Guetlein (2016), ambiguity aversion is often not considered when risk-aversion is the subject of interest. She argues that "It could be desirable to look at risk and ambiguity jointly."…”

Section: Cautiousnessmentioning

confidence: 99%

Do anticipated consequences of climate change affect risk preferences and cooperation? – An experimental study with farmers, students, and representatives of the general population of Germany

Grüner¹

2022

Preprint

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Climate change is one of the main challenges of our time. This paper examines how anticipated consequences of climate change influence individual and collective decision-making. Using a controlled information intervention experiment, we find that farmers in Germany – who are likely to be affected by climate change – increase their willingness to invest in risky assets but their cooperation behavior remains largely unaffected. In contrast to previous experiments on information provision, our results suggest that emotions cannot explain subjects’ behaviors. We argue that reminding of anticipated consequences of climate change can reactivate individuals’ memories that actions are necessary and, in turn, overcome inertia (JEL C91, C92, D01, D81, D91, H41, Q12, Q54).

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Implied Ambiguity: Mean-Variance Inefficiency and Pricing Errors

Hara

Honda

2022

Management Science

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We investigate the optimal portfolio choice problem for an investor who has a utility function of the smooth ambiguity model. We identify necessary and sufficient conditions for a given portfolio to be optimal for such an investor. We define the implied ambiguity of a portfolio as the smallest ambiguity aversion coefficient with which the portfolio is optimal, and the measure of ambiguity perception as the part of the variability in asset returns that can be attributed to the ambiguity. We show that there are one-to-one relations between the implied ambiguity, the Sharpe ratio, and the pricing errors when the portfolio is taken as the pricing portfolio, and that the measure of ambiguity perception is determined by the Sharpe ratio and the alpha. Based on the U.S. stock market data, we assess how ambiguity averse the representative investor is and what types of stocks the investor perceives as having more ambiguous returns than others. This paper was accepted by Manel Baucells, behavioral economics and decision analysis.

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Comparative Risk Aversion in the Presence of Ambiguity

Cited by 4 publications

References 16 publications

The impact of risk aversion and ambiguity aversion on annuity and saving choices

The impact of risk aversion and ambiguity aversion on annuity and saving choices

Do anticipated consequences of climate change affect risk preferences and cooperation? – An experimental study with farmers, students, and representatives of the general population of Germany

Implied Ambiguity: Mean-Variance Inefficiency and Pricing Errors

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