There are two phenomena in behavioral finance and economics which are seemingly unrelated and have been studied separately; overconfidence and ambiguity aversion. In this paper we are trying to link these two phenomena providing a theoretical foundation supported by evidence from an experimental...

A Principal-Agent model in which the principal and the agent are ambiguity averse is examined. A novel role for the optimal contract is to induce a speci c partition of the state space for the agent as a means of manipulating the ambiguity he faces, thereby providing more efficient contracting....

Assuming that probabilities (capacities) of events are random, this paper introduces a novel model of decision making under ambiguity, called Shadow probability theory, a generalization of the Choquet expected utility. In this model, probabilities of observable events in a subordinated...

There are two phenomena in behavioral finance and economics which are seemingly unrelated and have been studied separately; overconfidence and ambiguity aversion. In this paper we are trying to link these two phenomena providing a theoretical foundation supported by evidence from an experimental...

We view innovation investment as a real option and explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions. Our analysis uses a risk measure and a new outcome-independent measure of ambiguity. We find a consistently significant negative effect of ambiguity...

We provide new empirical evidence on investors' firm-level trading behavior in response to daily changes in stock ambiguity-Knightian uncertainty. The effect of ambiguity is distinct from and contrasts with the well-documented effect of risk, and shares a similar economic significance. An...

Ellsberg (1961) proposes two alternative frames to elicit individuals' preferences for ambiguity. Through an experiment, we find that Ellsberg's three-color one-urn frame induces very different revealed preferences than the two-color two-urn frame. In both frames, we document ambiguity aversion...

We study the effect of ambiguity — Knightian uncertainty — on payout policy. We find that firm-level ambiguity increases and accelerates payout, via both dividends and share repurchases. This positive effect of ambiguity is distinct from the known negative effect of risk on payout policy....