Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers

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URL:	https://ub-madoc.bib.uni-mannheim.de/891
URN:	urn:nbn:de:bsz:180-madoc-8917
Document Type:	Working paper
Year of publication:	2004
The title of a journal, publication series:	None
Publication language:	English
Institution:	Außerfakultäre Einrichtungen > VWL insb Makroök u Wirtschaftspol (Börsch-Supan 1989-2011)
MADOC publication series:	Veröffentlichungen des MEA (Mannheim Research Institute For the Economics of Aging) > MEA Discussion Papers
Subject:	330 Economics
Classification:	JEL: D81 G20 ,
Subject headings (SWD):	Ambiguität , Pessimismus , Optimismus , Investor
Abstract:	We define pessimistic, respectively optimistic, investors as CEU (Choquet expected utility) decision makers who update their pessimistic, respectively optimistic, beliefs according to a pessimistic (Dempster-Shafer), respectively optimistic, update rule. This paper then demonstrates that, in contrast to optimistic investors, pessimistic investors may strictly prefer investing in an illiquid asset to investing in a liquid asset. Key to our result is the dynamic inconsistency of CEU decision making, implying that a CEU decision maker ex ante prefers a different strategy with respect to prematurely liquidating an uncertain long-term investment project than after learning her liquidity needs. Investing in an illiquid asset then serves as a commitment device guaranteeing an ex ante favorable outcome.
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