ORA (Round 5) Ambiguity in Dynamic Environments
Lead Research Organisation:
Queen Mary University of London
Department Name: Economics
Abstract
Uncertainty plays a fundamental role in financial markets and strategic conflicts. In many real-world situations, it is not possible to model uncertainty by means of well-defined probability distributions. Instead, participants face Knightian uncertainty: they do not know the exact probability distribution over possible outcomes. In view of this, it is important to incorporate such Knightian uncertainty or ambiguity into the analysis of markets and strategic conflicts. This project aims to clarify the foundations for ambiguity in dynamic financial markets and strategic interactions. As a by-product, we aim to unify different (extant) approaches to modeling preferences and decision making in games under ambiguity. The issue of dynamic consistency will now be of particular concern. We apply our newly developed theoretical tools to a concrete economic problems by studying in detail the consequences of Knightian uncertainty in strategic interactions like dynamic contracts and elections on the one hand, as well as in markets under uncertainty, including portfolio choice and asset pricing with heterogeneous agents and incomplete information.
Planned Impact
We expect our research to have important consequences for the understanding of strategic interactions, financial markets, the design of economic institutions, and political platforms. We aim to have our research published in the best journals in the fields of economics, finance, and related fields.
The planned workshops and conference in the second and third years will have a positive externality on the research community as a whole since we will provide a forum in which ideas and the latest results in this vibrant area of research can be shared. As mentioned, we will also present our work at regular, high profile, international conferences, such as the different Econometric Society meetings, European and American Economic Association meetings, the Game Theory Society Congress, and the Risk, Uncertainty and Decision Conference, and we will plan to participate in occasional and smaller events (e.g., conferences, workshops, and seminars).
We will thus aim to reach a broader audience by making our research accessible to the general public with the help of media outlets like Economist, Handelsblatt, and Figaro. Riedel has thus far published in Neue Zürcher Zeitung, Frankfurter Allgemeine Zeitung, and Handelsblatt. If relevant, he plans to make the results of our research available to the general public through similar outlets. Riedel also possesses expertise in gathering researchers from various related fields in the social and natural sciences (e.g., philosophy, sociology, and biology) to discuss potentially interesting interdisciplinary implications of our research. It is therefore possible to envisage to form the formation of an additional research group at Bielefeld's Center for Interdisciplinary Studies after the completion of this project (e.g., in 2022).
All the scientific work performed as a part of this project will be also disseminated via the PSE '5 articles in 5 minutes' operation, which sends extended abstracts (written such that the research is accessible to a wide audience) to some 2,000 followers. The PSE letter (4 issues annually; widely distributed throughout the world) will also echo the research performed in this project.
The planned workshops and conference in the second and third years will have a positive externality on the research community as a whole since we will provide a forum in which ideas and the latest results in this vibrant area of research can be shared. As mentioned, we will also present our work at regular, high profile, international conferences, such as the different Econometric Society meetings, European and American Economic Association meetings, the Game Theory Society Congress, and the Risk, Uncertainty and Decision Conference, and we will plan to participate in occasional and smaller events (e.g., conferences, workshops, and seminars).
We will thus aim to reach a broader audience by making our research accessible to the general public with the help of media outlets like Economist, Handelsblatt, and Figaro. Riedel has thus far published in Neue Zürcher Zeitung, Frankfurter Allgemeine Zeitung, and Handelsblatt. If relevant, he plans to make the results of our research available to the general public through similar outlets. Riedel also possesses expertise in gathering researchers from various related fields in the social and natural sciences (e.g., philosophy, sociology, and biology) to discuss potentially interesting interdisciplinary implications of our research. It is therefore possible to envisage to form the formation of an additional research group at Bielefeld's Center for Interdisciplinary Studies after the completion of this project (e.g., in 2022).
All the scientific work performed as a part of this project will be also disseminated via the PSE '5 articles in 5 minutes' operation, which sends extended abstracts (written such that the research is accessible to a wide audience) to some 2,000 followers. The PSE letter (4 issues annually; widely distributed throughout the world) will also echo the research performed in this project.
Publications
Beissner P
(2023)
Robust Utility in Contiuous Time
in SSRN Electronic Journal
Billot A
(2020)
Market Allocations under Ambiguity: A Survey
in Revue économique
Billot Antoine
(2020)
Market Allocations under Ambiguity: A Survey
in REVUE ECONOMIQUE
Cheng, X
(2024)
Persuasion with Ambiguous Communication
Hanany E
(2020)
Incomplete Information Games with Ambiguity Averse Players
in American Economic Journal: Microeconomics
Hara C
(2022)
Efficient Allocations under Ambiguous Model Uncertainty
in SSRN Electronic Journal
Klibanoff P
(2022)
Foundations of ambiguity models under symmetry: a-MEU and smooth ambiguity
in Journal of Economic Theory
Mukerji S
(2023)
TRADING AMBIGUITY: A TALE OF TWO HETEROGENEITIES
in International Economic Review
| Description | Model ambiguity, that is, uncertainty about the data generating process, may evolve over time in ways that enrich and enliven decision environments. While learning may diminish perceived ambiguity, it does not necessarily do so. News that can make a decision maker suspect that the data generating process relevant for the near future is likely to be different from that (believed to have been) operating in the recent past, may well increase ambiguity. The unfolding of the financial and economic crises over the past decade, signals of global warming and the more recent pandemic provide obvious, macro-level examples. Indeed, several of these have registered as events of uncertainty shocks on uncertainty indices. Arrival of such information, from multiple sources and agencies, is pretty relentless and near-continuous. Studying dynamics of decision-making sensitive to (possibly) continuous innovations in ambiguity in the decision environment, is of interest. In the research output, "Robust utility in Continuous Time," we formulate a tractable model of dynamic decision-making in an environment where innovations in ambiguity may arise continuosly and where the the decision maker seeks choices that are more robust to the ambiguity. In the research output, Trading Ambiguity: A tale of two heterogenieties, we consider markets with heterogeneously ambiguous assets and heterogeneously ambiguity averse investors whose preferences are a parsimonious extension of the mean-variance framework. We study portfolio choice and trade upon arrival of public information, and show systematic departures from the predictions of standard theory, that occur in the direction of empirical regularities. In particular, our theory speaks to several phenomena in a unified fashion: the asset allocation puzzle, the observation that earnings announcements are followed by significant trading volume with small price change, and that increases in uncertainty are positively associated with increased trading activity and portfolio rebalancing toward safer assets. In the research output, Sharing Model Uncertainty, we study efficient allocations when consumers have heterogeneous smooth ambiguity preferences with a common, point-identified, set of statistical models as the source of ambiguity. Furthermore, aggregate endowment is ambiguous. We characterize economies where the representative consumer is also of the smooth ambiguity type and find efficient sharing rules in these economies. With heterogeneous ambiguity aversion, sharing rules exhibit systematic departures from those that obtain in economies where consumers are the usual expected utility type. The representative consumer's nature departs from the typical single-agent assumption, making for more compelling assetpricing predictions. The insights extend to the case where models are only set-identified. In the research output, Incomplete Information games with Ambiguity Averse players, we propose and analyse solution concepts for dynamic incomplete information games where players may perceive ambiguous uncertainty, in particular about the incentives and characteristics of other players. Our framework allows modeling and understanding strategic use of ambiguity. In the research output, Persuasion with Ambiguous Communication, we explore whether and to what extent using ambiguous communication strategically can be beneficial for the sender and establish necessary and sufficient conditions under which such benefit will arise. An illustrative example in the context of banking regulation and stress testing is provided. |
| Exploitation Route | By applying the modeling frameworks introduced. |
| Sectors | Environment Financial Services and Management Consultancy |