Reference dependent ambiguity

Motivated by experimental and empirical evidence, I develop a theoretical framework to study how reference-points – such as a status quo, endowment or default option – can distort the way an individual perceives and responds to ambiguity. I use this framework to characterize various models of reference-dependent ambiguity, and provide behavioral foundations for comparative ambiguity attitudes and reference behaviors. I also illustrate some implications of reference-dependent ambiguity for trade in an asset market, including limited participation, underdiversification, and market collapse.