Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/61311
Authors: 
Viefers, Paul
Year of Publication: 
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

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