In this paper, I show that persistent pricing anomalies are consistent with a market that includes ambiguity averse investors. In particular, I show that ambiguity averse investors may prefer to trade based on aggregate signals that reduce ambiguity at the cost of a loss in information. Because the aggregate signals preferred by ambiguity averse investors are not sufficient statistics for the c...

Preference reversals are found in measurements of ambiguity aversion even under constant psychological and informational circumstances. The reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context-dependent weightings of attributes. We offer an explanation based on Sugden’s random-reference theory with different elicitation me...

This paper analyses a bilateral trade problem with asymmetric information and ambiguity aversion. There is a buyer and a seller who bargain over the exchange of an indivisible good. The seller is privately informed about the quality of the good, which determines both his valuation and the buyer’s valuation. In the absence of ambiguity, the contract that maximizes the buyer’s payoff is a posted ...

Individuals are often ambiguity-averse when choosing among purely chance-based prospects (Ellsberg, 1961). However, they often prefer apparently ambiguous ability-based prospects to unambiguous chance-based prospects. According to the competence hypothesis (Heath & Tversky, 1991), this pattern derives from favorable perceptions of one’s competence. In most past tests of the competence hypothesi...

We apply a model of preferences for information to the domain of decision making under risk and ambiguity. An uncertain prospect exposes an individual to an information gap. Gambling makes the missing information more important, attracting more attention to the information gap. To the extent that the uncertainty (or other circumstances) makes the information gap unpleasant to think about, an in...

When ambiguity-averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fun...