English, Article, Journal or magazine article edition: Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers Alexander Ludwig; Alexander Zimper

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers
Author
  • Alexander Ludwig
  • Alexander Zimper
Physical Description
  • preprint
Notes
  • 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 invest- ment project than after learning her liquidity needs. Investing in an illiquid asset then serves as a commitment device guaranteeing an ex ante favorable outcome.
  • RePEc:xrs:meawpa:04060
  • RePEc:mea:meawpa:04060
Language
  • English
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