reference dependent ambiguity abstract motivated by experimental and empirical evidence i study a framework where reference points such as a status quo endowment or default option can distort the way an individual responds to ambiguity i characterize a model of reference dependent maxmin expected utility and provide behavioral foundations for comparing reference dependent ambiguity attitudes i also illustrate some implications of reference dependent ambiguity for trade in an asset market including underdiversification no trade and the potential for a market collapse

uncertainty and risk in financial markets this paper considers a general equilibrium model in which the distinction between uncertainty and risk is formalized by assuming agents have incomplete preferences over statecontingent consumption bundles as in bewley 1986 without completeness individual decision making depends on a set of probability distributions over the state space a bundle is preferred to another if and only if it has larger expected utility for all probabilities in this set when preferences are complete this set is a singleton and the model reduces to standard expected utility in this setting we characterize pareto optima and equilibria and show that the presence of uncertainty generates robust indeterminacies in equilibrium prices and allocations for any specification of initial endowments we derive comparative statics results linking the degree of uncertainty with changes in equilibria despite the presence of robust indeterminacies we show that equilibrium prices and allocations vary continuously with underlying fundamentals equilibria in a standard risk economy are thus robust to adding small degrees of uncertainty finally we give conditions under which some assets are not traded due to uncertainty aversion

bidding models of housing markets abstract the bid rent model which is the standard bidding model of housing markets fails to take account of three important characteristics of the bidding process that operates in these markets the prices of houses are established through sequential bidding so that sellers do not necessarily accept the highest bids that might be made for their houses ignorance of the market may lead potential buyers to make bids that are either higher or lower than the ones they would make if they had complete information and the distribution of bids for a house is truncated at the seller s asking price this paper describes a bidding model that incorporates these characteristics of housing markets the new model and the standard model are estimated econometrically and tested against one another using data from the baltimore maryland area the test results indicate strong rejection of the standard model it is concluded that the new model provides a better description of the operation of housing markets than does the standard model

asset allocation with distorted beliefs and transaction costs abstract in this paper we study the problem of the optimal portfolio selection with transaction costs for a decision maker who is faced with knightian uncertainty the decision maker s portfolio consists of one risky and one risk free asset and we assume that the transaction costs are proportional to the traded volume of the risky asset the attitude to uncertainty is modeled by the choquet expected utility we derive optimal strategies and bounds of the no transaction region for both optimistic and pessimistic decision makers the no transaction region of a pessimistic investor is narrower and its bounds lie closer to the origin than that of an optimistic trader moreover under the choquet expected utility the structure of the no transaction region is not necessarily a closed interval as it is under the standard expected utility model

the efficiency of demand oriented housing programs generalizing from experimental findings typical production oriented housing programs offer potential recipients a highly limited set of previously unattainable commodity bundles from the household s viewpoint such programs have been highly inefficient from society s viewpoint such housing programs are generally horizontally inequitable and inefficient given that housing programs are not likely to be fully cashed out and incorporated into general income maintenance could housing programs be restructured to increase their efficiency this paper examines this question results indicate that demand oriented housing programs are substantially more efficient than are production oriented programs in fact in the aggregate the former programs approach unrestricted cash payments in their transfer efficiency

investment in new activities and the welfare cost of uncertainty abstract recent literature has shown that trade distortions are associated with first order costs stemming from the induced drop in the formation of new activities we demonstrate that uncertainty may induce similar welfare costs and that these costs apply also to a closed economy this argument is illustrated in romer s model of a dependent economy where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production we show that knightian uncertainty inhibits the formation of new activities leading to first order losses whereas risk aversion alone leads to second order losses

ambiguity and uncertainty in ellsberg and shackle this paper argues that the similarities between ellsberg s and shackle s frameworks for discussing the limits of the probabilistic approach to decision theory are more important than usually admitted the paper discusses the grounds on which the ambiguity surrounding the decision maker in ellsberg s urn experiments can be deemed analogous to the uncertainty faced by shackle s entrepreneur taking crucial decisions the two authors insights are assessed and special attention is paid to the criteria for decision under uncertainty they put forward the paper establishes a link between ellsberg s and shackle s perspectives and the non additive probability approach of gilboa and schmeidler an approach that offers an alternative to standard probability calculus which can be of use to analyse both ambiguity and uncertainty the comparison between ellsberg and shackle draws on an interpretation of keynes s treatise on probability emphasising keynes s rejection of both well defined probability functions and maximisation as a guide to human conduct it is shown that keynes s viewpoint implies a reconsideration of the boundaries of probability theory that is in the same vein of ellsberg s and shackle s concern in the years of the consolidation of savage s new probabilistic mainstream copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

on booms that never bust ambiguity in experimental asset markets with bubbles we study the effect of ambiguity on the formation of bubbles and on the occurrence of crashes in experimental asset markets a la smith suchanek and williams 1988 we extend their framework to an environment where the fundamental value of the asset is ambiguous we show that when the fundamental value is ambiguous asset prices tend to be lower than when it is risky although bubbles form in both the ambiguous and the risky environments additionally bubbles do not crash in the ambiguous case whereas they do so in the risky one these findings regarding depressed prices and the absence of crashes in the presence of ambiguity are in line with recent theoretical work stressing the crucial role of ambiguity to account for surprisingly low equity prices high returns as well as herding in asset markets

model misspecification and underdiversification in this paper we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification we develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks we find that when the overall ambiguity about the joint distribution of returns is high then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean variance portfolio

iq and stock market participation stock market participation is monotonically related to iq controlling for wealth income age and other demographic and occupational information the high correlation between iq and participation exists even among the affluent supplemental data from siblings studied with an instrumental variables approach and regressions that control for family effects demonstrate that iq s influence on participation extends to females and does not arise from omitted familial and nonfamilial variables high iq investors are more likely to hold mutual funds and larger numbers of stocks experience lower risk and earn higher sharpe ratios we discuss implications for policy and finance research

ambiguity models and the machina paradoxes daniel ellsberg 1961 constructed counterexamples to show the limitations of leonard j savage s 1954 subjective expected utility seu ellsberg s examples involved a comparison between objective uncertainty risk in which probabilities are known and subjective uncertainty in which they are not the prevailing prefer ence for objective over subjective uncertainty known as ambiguity aversion raised an important paradox for economic theory since ellsberg s classical work many models have been developed to generalize seu in order to accommodate the pref erence for objective over subjective uncertainty in the same manner as ellsberg mark j machina 2009 proposed two examples that falsify one of the seu generalizations david schmeidler s 1989 choquet expected utility ceu this article shows that the impact of machina s examples is not restricted to the model initially targeted his examples pose difficulties not only for ceu but also for the four other most popular and widely used models of ambiguity averse preferences namely maxmin expected utility itzhak gilboa and schmeidler 1989 variational preferences fabio maccheroni massimo marinacci and aldo rustichini 2006 a maxmin paolo ghirardato maccheroni and marinacci 2004 and the smooth model of ambiguity aversion peter klibanoff marinacci and sujoy mukerji 2005 consequently the implications for economics are more pro found than initially thought we also discuss marciano siniscalchi s 2009 vector expected utility veu model which can account for the typical ambiguity averse preferences in machina s examples finally we examine how our results are related to the uncertainty aver sion axiom which is assumed in virtually all commonly used decision models under ambiguity in particular we argue that machina s examples demonstrate that the uncertainty aversion axiom can be overly restrictive in some circumstances the article proceeds as follows section i presents the four models of ambiguity averse preferences which are alternatives to ceu and which are examined in this paper in section ii and iii the implications of machina s examples for these models are presented section iv discusses alternative models and the uncertainty aversion axiom

determinants of bargaining outcome in single family housing transactions an empirical examination using a hedonic regression model this paper examines determinants of bargaining outcome in single family housing transactions it divides potential factors into three broad categories dwelling attributes site amenities and seller s and buyer s characteristics results with use of 1990 data for the reno sparks area in nevada show that bargaining outcome is determined by seller s asking price buyer s household income and some of the dwelling attributes and site amenities this paper concludes that factors affecting housing price do not necessarily affect bargaining outcome and first time home buyers do not statistically bargain less than repeat home buyers

opaque trading disclosure and asset prices implications for hedge fund regulation we construct a rational expectations equilibrium model to investigate the effect of ambiguity about hedge fund strategies on market efficiency and aggregate welfare in our model some traders mutual funds view the equilibrium trading strategies of other traders hedge funds as ambiguous this ambiguity limits the ability of mutual funds to infer information from prices and affects the market performance we use this analysis to investigate the implications of regulations that affect the amount of ambiguity about hedge fund strategies or the cost of operating a hedge fund our analysis demonstrates how regulations affect asset prices and welfare through their influence on opaque trading

savage in the market we develop a behavioral axiomatic characterization of subjective expected utility seu under risk aversion given is an individual agent s behavior in the market assume a finite collection of asset purchases with corresponding prices we show that such behavior satisfies a revealed preference axiom if and only if there exists a seu model a subjective probability over states and a concave utility function over money that accounts for the given asset purchases

food scares in an uncertain world we develop a model that explains the stylized facts of food scares an immediate and sharp decline in consumption of the product followed by a slow and frequently partial recovery of demand after the scare passes the model is used in conjunction with the natural experiment afforded by the mad cow crisis to elicit empirical information on decision makers perception of uncertainty our theoretical and quantitative results suggest that observed behavior is consistent with sharp changes in beliefs and the presence of knightian uncertainty as measured by the degree of imprecision in our model

market structure and the price of housing services while many aspects of housing markets have been extensively analysed little empirical work has been undertaken on the supply of housing services despite this dearth of information many researchers have characterised the supply of housing as being competitive it is the intent of this article therefore to open up the discussion of the supply of housing services and to examine the extent of sellers market concentration over a set of multifamily rental housing submarkets new data on sellers concentration are presented a model to determine the effect of non competitive firm behaviour on the price of housing services is specified and estimated results support the hypothesis that the supply of housing services may not be perfectly competitive

the market for sweepstakes this paper studies the market for monopolistically supplied sweepstakes we derive equilibrium demands for fixed prize and variable prize sweepstakes and determine the profit maximizing prize level and pay out ratio respectively it can be profitable to offer each type of sweepstake when there is a large enough number of weighted utility consumers who have constant absolute risk attitudes are strictly averse to small as well as symmetric risks and display longshot preference behaviour moreover for the variable prize sweepstake the supplier will generally find it profitable to combine sweepstakes targeting two smaller populations and offer a single sweepstake to the combined population this implication is corroborated by the recent spate of mergers of smaller state lotteries into larger ones

applying regret theory to investment choices currency hedging decisions we apply regret theory an axiomatic behavioral theory to derive closed form solutions to optimal currency hedging choices investors experience regret of not having chosen the ex post optimal hedging decision hence investors anticipate their future experience of regret and incorporate it in their objective function we derive a model of financial decision making with two components of risk traditional risk volatility and regret risk we find results that are in sharp contrast with traditional expected utility loss aversion or disappointment aversion theories we discuss the empirical implications of our model and its ability to explain observed hedging behavior

optimism and pessimism in games this paper considers the impact of ambiguity in strategic situations it extends the earlier literature by allowing for optimistic responses to ambiguity ambiguity is modelled by ceu preferences we propose a new solution concept for players who may express ambiguitypreference then we study comparative statics of changes in ambiguity attitude in games with strategic complements this gives a precise statement of the impact of ambiguity on economic behaviour

the household s decision to accept or reject a conditional transfer offer households deemed by society to have insufficient resources to purchase an adequate commodity bundle are often offered aid i e additional resources conditional upon the households purchasing a given level of some commodity e g food fuel or housing such conditional transfers attempt to modify the households normal behavior i e if the households would normally purchase the required level of the designated commodity upon receipt of the transfer the constraint would not be necessary how these incentives and constraints interact to affect the households behavior determines in large part the number and type of eligibles aided by the program aggregate program costs given payment levels and the types of commodity bundles purchased by the recipient households clearly understanding the decision to accept or reject a conditional transfer offer has widespread implications for the costs of the transfer program the impact on eligible households and the attainment of society s objectives numerous studies have investigated the size and distribution of recipient benefits in conditional transfer programs 1 3 6 8 9 14 16 21 to this author s knowledge however no analysis has estimated a model of the household s decision to participate in a conditional transfer program using household data and a theoretically appropriate measure for the household s net gain to overcome this gap in our understanding of the household s

decision theory under ambiguity we review recent advances in the field of decision making under uncertainty or ambiguity we start with a presentation of the general approach to a decision problem under uncertainty as well as the standard bayesian treatment and issues with this treatment we present more general approaches choquet expected utility maximin expected utility smooth ambiguity and so forth that have been developed in the literature under the name of models of ambiguity sensitive preferences we draw a distinction between fully subjective models and models incorporating explicitly some information we review definitions and characterizations of ambiguity aversion in these models we mention the challenges posed by some of the models presented we end with a review of part of the experimental literature and applications of these models to economic settings

the efficiency of housing search previous research in the housing market has largely focused on housing market outcomes e g the quantity of housing services demanded or supplied or the determination of equilibrium prices scant attention has been directed at the processes producing these outcomes recently economists have developed models of buyer and seller search processes in housing markets 6 22 but almost no empirical testing of these models has been done the importance of search in economic markets has been discussed by lippman and mccall 15 the difficulties encountered by deterministic theories of economic markets in explaining different prices for identical commodities and persistent positive levels of unemployed resources are overcome when search is introduced search may be of even greater importance in housing markets than in most other economic markets housing generally accounts for the largest item of consumption for most households for homeowners housing is usually the household s largest asset housing is a heterogeneous commodity that is traded in highly decentralized markets 2 the costs of moving can be substantial reducing the gains from relocation the consumption of housing also involves externalities that add to the heterogeneity of the consumption bundle finally recent theoretical work by courant 6 suggests that the rational search behavior of households facing discrimination in housing markets might act to perpetuate adverse market conditions facing such households given the importance of housing as a consumption commodity and as an asset and the above characteristics of housing and housing markets previous descriptive examinations

sequential two player games with ambiguity if players beliefs are strictly non additive the dempster shafer updating rule can be used to define beliefs off the equilibrium path we define an equilibrium concept in sequential two person games where players update their beliefs with the dempster shafer updating rule we show that in the limit as uncertainty tends to zero our equilibrium approximates bayesian nash equilibrium by imposing context dependent constraints on beliefs under uncertainty

location housing and leisure demand muth s model of cbd employed household behavior has been successfully extended to include labor leisure choice in order to deal with the original version s deficient treatment of commuting time the extension demonstrates how all the basic results of the simpler formulation remain valid this paper provides a similar extension for the locally employed household variant of muth s model the analysis demonstrates a surprising difference between the demand gradient and comparative static results for the locally employed household without leisure choice and the locally employed household with leisure choice not observed for the cbd employed household model

estimation of complete demand systems from household budget data the linear and quadratic expenditure systems in this paper we explore two issues in empirical demand analysis the estimation of complete systems of demand equations using household budget data section i and the incorporation of demographic characteristics into such systems section ii although there are numerous studies which use time series data to estimate complete demand systems and many which estimate engel curves from household budget data there are virtually none which combine budget data from different periods to estimate complete systems since each budget study corresponds to a single price situation one might conjecture that estimation of complete systems would not be possible unless budget studies were available from a large number of periods this is incorrect in section i we argue that interesting complete demand systems can be estimated from a small number of budget studies despite the limited price variability represented in such data to demonstrate this we use budget study data for two periods to estimate a pair of related demand systems the familiar linear expenditure system les and a quadratic expenditure system qes a generalization of les in which the demand equations are quadratic in total expenditure the inclusion of demographic variables in the analysis of household consumption patterns is desirable because there are likely to be systematic differences in the consumption behavior of households with different demographic characteristics but the effects of demographic characteristics have seldom been studied within the framework of complete demand systems in section ii we propose translating as a general method for incorporating demographic variables into complete systems of demand equations this method has not previously been discussed as a general technique for bringing demographic variables into demand systems although it has been employed in several studies to improve the estimates of the les and the qes presented in section i we reestimate these two systems using translating to incorporate family size