Dynamic decision making under ambiguity : a portfolio choice experiment

Georgalos, Konstantinos (2016) Dynamic decision making under ambiguity : a portfolio choice experiment. Working Paper. Lancaster University, Department of Economics, Lancaster.

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Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, preferences are represented by Expected Utility and prior beliefs are updated according to Bayes rule, upon the arrival of partial information. Nevertheless, when one considers non-neutral ambiguity attitudes, either the axiom of dynamic consistency or of consequentialism should be relaxed. We report the results of a new experiment, designed to investigate how people behave in a dynamic choice problem under ambiguity, where decisions are made both before and after the resolution of some uncertainty. We study which of the two rationality axioms people violate, along with the question of whether this violation is part of a conscious planning strategy or not. The combination of the two, allows us to classify subjects to three behavioural types: resolute, naïve and sophisticated. Using data from a portfolio choice experiment where ambiguity is represented in a transparent and non-manipulable way, we cannot reject the hypothesis of Bayesian updating for half of our experimental population. For ambiguity non-neutral subjects, we find that the majority are sophisticated, a few are naïve and few are resolute.

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Monograph (Working Paper)
?? ambiguitysubjective beliefsdynamic consistencyconsequentialismportfolio choiceexperimentc91d81d83d90 ??
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08 Apr 2016 15:08
Last Modified:
22 Apr 2024 00:17