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Title:Should I stay or should I go? A laboratory analysis of investment opportunities under ambiguity PDF Logo
Authors:Viefers, Paul
Issue Date:2012
Series/Report no.:Discussion Papers, German Institute for Economic Research, DIW Berlin 1228
Abstract:This paper investigates the impact of uncertainty on an irreversible investment decisions in the laboratory. Subjects own the option to seize a claim on the future sum of realizations from an (ambiguous) random walk. I contrast model predicitions of the Subjective Expected Utility model (SEU, Savage, 1954) with model predictions made by Multiple-prior Expected Utility models (MEU, Gilboa & Schmeidler, 1989; Epstein & Schneider, 2003b). I present an experimental design that allows to identify behaviorally meaningful deviations from SEU. Observed behavior is at odds with the SEU prediction. On average, subjects in a treatment group, facing an ambiguous random walk, exhibit an ambiguity premium that presents a mark-up on average reservation profits in a control group. Hence, subjects shun to expose themselves to an ambiguous payoff process and invest later than participants facing a risky payoff process.
Subjects:Ambiguity aversion
multiple priors
optimal stopping
irreversible investment
JEL:D80
D83
Document Type:Working Paper
Appears in Collections:DIW-Diskussionspapiere
Publikationen von Forscherinnen und Forschern des DIW

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