Should I Stay or Should I Go? A Laboratory Analysis of Investment Opportunities Under Ambiguity

This paper studies the impact of Knightian uncertainty on the disposition of individuals in the lab to seize an irreversible investment. Subjects had the option to trade a safe endowment for a claim on the sum of future realizations from a geometric random walk. The drift of this profit process (high or low) depended on an unobservable binary state of the world, which was uncertain in a treatment group and risky in a control group. Despite the fact that subjects in both groups could initially bet on the state of the world to obtain the high drift, subjects in the treatment group seize the investment at significantly higher values of the process than subjects in the control group. This behavior is irreconcilable with subjective expected utility, but indicates behavior predicted under dynamic multiple-prior preferences à la Gilboa-Schmeidler