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473
Measuring Expectations
, 2004
"... This article discusses the history underlying the new literature, describes some of what has been learned thus far, and looks ahead towards making further progress ..."
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Cited by 251 (14 self)
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This article discusses the history underlying the new literature, describes some of what has been learned thus far, and looks ahead towards making further progress
EXPECTED UTILITY WITH PURELY SUBJECTIVE NONADDITIVE PROBABILITIES
, 1987
"... Acts are functions from the set of states of the world into the set of consequences. Savage proposed axioms regarding a binary relation on the set of acts which are necessary and sufficient for it to be representable by the functional gu(.)dP for some realvalued (utility) function u on the set of c ..."
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Cited by 217 (2 self)
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Acts are functions from the set of states of the world into the set of consequences. Savage proposed axioms regarding a binary relation on the set of acts which are necessary and sufficient for it to be representable by the functional gu(.)dP for some realvalued (utility) function u on the set of consequences and a (probability) measure P on the set of states of the world. The Ellsberg paradox leads us to reject one of Savage’s main axioms the Sure Thing Principleand develop a more general theory, in which the probability measure need not be additive.
Portfolio Selection with Parameter and Model Uncertainty: A MultiPrior Approach
, 2006
"... We develop a model for an investor with multiple priors and aversion to ambiguity. We characterize the multiple priors by a "confidence interval" around the estimated expected returns and we model ambiguity aversion via a minimization over the priors. Our model has several attractive featu ..."
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Cited by 114 (4 self)
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We develop a model for an investor with multiple priors and aversion to ambiguity. We characterize the multiple priors by a "confidence interval" around the estimated expected returns and we model ambiguity aversion via a minimization over the priors. Our model has several attractive features: (1) it has a solid axiomatic foundation; (2) it is flexible enough to allow for different degrees of uncertainty about expected returns for various subsets of assets and also about the returngenerating model; and (3) it delivers closedform expressions for the optimal portfolio. Our empirical analysis suggests that, compared with portfolios from classical and Bayesian models, ambiguityaverse portfolios are more stable over time and deliver a higher outof sample Sharpe ratio.
Robust portfolio rules and asset pricing
, 1999
"... Parameter uncertainty or, more broadly, model uncertainty seems highly relevant in many aspects of financial decisionmaking. I explore the effects of such uncertainty on dynamic portfolio and consumption decisions, and on equilibrium asset prices. In particular, I use the framework of Anderson, Ha ..."
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Cited by 96 (0 self)
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Parameter uncertainty or, more broadly, model uncertainty seems highly relevant in many aspects of financial decisionmaking. I explore the effects of such uncertainty on dynamic portfolio and consumption decisions, and on equilibrium asset prices. In particular, I use the framework of Anderson, Hansen and Sargent (1999), which attributes a preference for robustness to the decisionmaker. Worried that the model she uses is misspecified, a robust agent seeks decision rules that insure against some worstcase misspecification, in accordance with maxmin expected utility. I demonstrate that robustness dramatically decreases the portfolio demand for equities. When modifying the framework of Anderson, Hansen and Sargent to impose homotheticity, I find robustness to be observationally equivalent to recursive preferences: robustness increases risk aversion, without affecting the willingness to substitute intertemporally. When investment opportunity sets are timevarying, robustness leads to an additional hedgingtype asset demand, even for logarithmic utility. In an equilibrium exchange economy, robustness increases the equilibrium equity premium. The endogenous worstcase scenario for equity returns supporting the equilibrium is shown to be the equilibrium return generated by a model without robustness. Because of this, matching both the equity premium and the riskfree rate is challenging.
Model Misspecification and UnderDiversification
 JOURNAL OF FINANCE
, 2002
"... In this paper we develop a model of intertemporal portfolio choice where an investor accounts explicitly for the possibility of model misspecification. This work is motivated by the difficulty in estimating precisely the probability law for asset returns. Our contribution is to develop a framework t ..."
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Cited by 72 (9 self)
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In this paper we develop a model of intertemporal portfolio choice where an investor accounts explicitly for the possibility of model misspecification. This work is motivated by the difficulty in estimating precisely the probability law for asset returns. Our contribution is to develop a framework that allows for ambiguity about the joint distribution of returns for all stocks being considered for the portfolio, and also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks. We then use this framework to derive in closedform the optimal portfolio weights of an investor who accounts for model misspecification. We illustrate the model by calibrating it to data on international equity returns. The calibration shows 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 meanvariance portfolio.
Betrayal Aversion: Evidence from . . .
, 2008
"... Due to betrayal aversion, people take risks less willingly when the agent of uncertainty is another person rather than nature. Individuals in six countries (Brazil, China, Oman, Switzerland, Turkey, and the United States ..."
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Cited by 57 (6 self)
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Due to betrayal aversion, people take risks less willingly when the agent of uncertainty is another person rather than nature. Individuals in six countries (Brazil, China, Oman, Switzerland, Turkey, and the United States
Estimating Ambiguity Aversion in a Portfolio Choice Experiment
, 2009
"... We report a laboratory experiment that enables us to estimate four prominent models of ambiguity aversion — Subjective Expected Utility (SEU), Maxmin Expected Utility (MEU), Recursive Expected Utility (REU), and αMaxmin Expected Utility (αMEU) — at the level of the individual subject. We employ g ..."
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Cited by 53 (5 self)
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We report a laboratory experiment that enables us to estimate four prominent models of ambiguity aversion — Subjective Expected Utility (SEU), Maxmin Expected Utility (MEU), Recursive Expected Utility (REU), and αMaxmin Expected Utility (αMEU) — at the level of the individual subject. We employ graphical representations of threedimensional budget sets over bundles of Arrow securities, one of which promises a unit payoff with a known probability and two with unknown (ambiguous) probabilities. The sample exhibits considerable heterogeneity in preferences, as captured through parameter estimates. Nonetheless, there exists a strong tendency to equate the demands for The experiment was conducted at the Experimental Social Science Laboratory (XLab) at UC Berkeley. We thank Raymond Fisman for detailed comments and suggestions. We are also grateful to Yoram Halevy, Tom Palfrey, Chris Shannon, and Bill Zame for helpful discussions. This paper has also benefited from suggestions by the participants