The important concept of ambiguity

In behavioural finance, “ambiguity aversion” expresses the fact that economic agents prefer known risks (the probability distribution of outcomes is known) to unknown risks (the probability distribution of outcomes is unknown). They therefore prefer to make a risky choice, the possible outcomes of which are known, even if they are not very positive, over a risky choice with unknown possible outcomes. (1) Ambiguity aversion may explain many characteristics of financial markets: Home bias, or savers’ preference for domestic financial assets; The fact that many savers do not hold shares; The fact that employees like to hold shares in their company. (1) See: Seminal paper: D. Ellsberg (1961), “Risk, Ambiguity, and the Savage Axioms”, The Quarterly Journal of Economics, vol. 75, no. 4; And also: Epstein (1999), “A Definition of Uncertainty Aversion”, The Review of Economic Studies, July, vol. 66, no. 3; A n article showing that ambiguity may explain the absence of shareholding among many households: D. Easley, M. O’Hara (2009), “Ambiguity and Nonparticipation: The Role of Regulation”, The Review of Financial Studies, vol. 22, no. 5; On t he link between ambiguity and financial market incompleteness: S. Mukerji, J-M. Tallon (2000) “Ambiguity Aversion and Incompleteness of Financial Markets”, University of Oxford, Department of Economics, Discussion Paper no. 46, December; The survey by M. Machina and S. Siniscalchi in the Handbook of the Economics of Risk and Uncertainty, chapter 13, “Ambiguity and Ambiguity Aversion”, vol. 1, 2014.