Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers
Inhalt
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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