Ambiguity in Choice and Market Environments: On the Importance of Comparative Ignorance

Abstract

Studies of individual choices have yielded evidence of the importance of comparative ignorance. Aversion to ambiguity - where information about probabilities is missing - is strengthened when a comparison to risky lotteries with known probabilities is available. The current study advances this literature by exploring the importance of this finding for market outcomes and finds support for the comparative ignorance in the market setting. A sizeable effect of ambiguity on prices is observed – but only when the experimental treatment makes the risky and ambiguous assets easily comparable. Further, when ambiguity is salient, individual attitudes towards ambiguity and behavior in the marketplace are linked; ambiguity-averse subjects tend to avoid ambiguous assets in the marketplace. However, a simple experimental manipulation that makes the distinction between risk and ambiguity less salient changes outcomes dramatically; the correlation between individual ambiguity attitudes and market allocations disappears, and market prices of risky and ambiguous assets converge.

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