1932

Abstract

The Ellsberg paradox suggests that people's behavior is different in risky situations—when they are given objective probabilities—from their behavior in ambiguous situations—when they are not told the odds (as is typical in financial markets). Such behavior is inconsistent with subjective expected utility (SEU) theory, the standard model of choice under uncertainty in financial economics. This article reviews models of ambiguity aversion. It shows that such models—in particular, the multiple-priors model of Gilboa and Schmeidler—have implications for portfolio choice and asset pricing that are very different from those of SEU and that help to explain otherwise puzzling features of the data.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-120209-133940
2010-12-05
2024-12-09
Loading full text...

Full text loading...

/content/journals/10.1146/annurev-financial-120209-133940
Loading
/content/journals/10.1146/annurev-financial-120209-133940
Loading

Data & Media loading...

Supplementary Data

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error