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Ambiguity vs. Risk in Investment Decisions: A Continuous Decomposition / Geoffrey Heal, Marcella Lucchetta.
- Format:
- Book
- Author/Creator:
- Heal, Geoffrey.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w35488.
- NBER working paper series no. w35488
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2026.
- Summary:
- This paper provides a novel framework for assessing the effect of ambiguity on asset values within the Klibanoff-Marinacci-Mukerji (KMM) smooth ambiguity framework. By shifting the analysis into a continuous space of prior probabilities, we establish that ambiguity leads to an adjustment of beliefs ("ambiguity-adjusted probabilities" or "distorted probabilities") characterized by First-Order Stochastic Dominance (FSD). Leveraging this property, we introduce a systematic economic decomposition of asset valuation separating the baseline risky valuation from the structural cost of uncertainty. Our continuous framework shows that increased ambiguity aversion depresses optimal asset demand.
- Notes:
- July 2026.
- Print version record
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