The Pension Research Council
Working Paper

Ambiguity Attitudes and Economic Behavior: Evidence from a U.S. Household Survey

Stephen G. Dimmock, Roy Kouwenberg, Olivia S. Mitchell, and Kim Peijnenburg
WP2012-20

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Abstract — We measure the ambiguity attitudes of a representative sample of U.S. households using a custom-designed module in the American Life Panel, and we test the relation between ambiguity attitudes and economic behavior. Our results show that ambiguity attitudes vary across people: about half are ambiguity averse, around 10% are ambiguity neutral, and close to 40% are ambiguity seeking. Within-subject attitudes are sensitive to the likelihood of ambiguous events, with a tendency to overweight unlikely events and to underweight highly likely events, a pattern termed ?ambiguity-likelihood insensitivity.' We test whether individuals' ambiguity attitudes can explain their decisions regarding equity market participation, asset allocation, retirement planning efforts, and insurance ownership. Results are largely consistent with theoretical predictions: higher ambiguity aversion is associated with less equity market participation, a lower fraction of financial wealth allocated to stocks, and people engage in more retirement planning. High ambiguity-likelihood insensitivity is associated with a higher probability of owning insurance.