The effects of ambiguity on entrepreneurship

We incorporate ambiguity (Knightian uncertainty) into a classic model of entrepreneurship to analyze, among other things, its effects on the optimal level of business startups, the relation between total assets and the size of the entrepreneurial investment, the effects of increasing ambiguity on developing new ventures, and the decision to self‐select into entrepreneurship for an indifferent decision maker. We first show that, under the monotone‐likelihood ratio property, the introduction of ambiguity negatively affects the optimal entrepreneurial investment, something that is consistent with most experimental evidence about entrepreneurial choice under ambiguity. Then, we show that the classical explanations for the positive correlation between total assets and business startups based on decreasing absolute risk aversion preferences and prudent behavior can be challenged when ambiguity is incorporated into the analysis, and we provide the conditions that guarantee that the traditional comparative static result under risk is replicated under ambiguity. We also show that increases in ambiguity aversion reduce entrepreneurial activities. Finally, we discuss our results under alternative ways of modeling ambiguity.     

Managing ambiguity: merger activity in the nonprofit housing sector

Merger behaviour in the nonprofit sector has been relatively neglected, yet has considerable marketing implications. This paper draws on a range of sources to explore the nature of merger activity in the nonprofit housing industry. It locates mergers within debates about inter-organisational strategies, and explores the context, extent, motivations for and regulation of mergers in the housing industry. While there are many similarities in environmental stimuli to and processes of negotiating mergers between the profit-distributing and nonprofit sectors, there are some distinctive features. This research explores the ambiguous nature of the merger activity among housing organisations. This ambiguity infects the terminology and record-keeping systems and helps to explain a significant gap between rhetoric and activity. Such ambiguity may be more than a negotiating strategy. It may represent the attempt to manage conflicting pressures to market nonprofit organisations as ‘sensitively serving the needs of society’ by on the one hand being competitive and efficient while on the other remaining value based and locally accountable. Copyright © 1999 Henry Stewart Publications     

Leading knowledge-workers through situated ambiguity

The paper explores how formal leaders make sense of and deal with autonomy of knowledge-workers. Based on interviews, I suggest that leaders make sense of knowledge-workers’ autonomy as ranging from perfectly autonomous to too autonomous to less independent to acting childish. This ambiguity was dealt with by making sense of leading as ranging from facilitative and supportive approaches to more controlling, even reprimanding acts. This empirical investigation of constructions of ‘leader/ship’ and ‘followers’ contributes to leader/ship-follower/ship literature. The paper’s contribution to theory lies in the notion of situated ambiguity; a way to understand the emerging way through which formal leaders navigate and smoothly move between their own differing perspectives, different practical situations, various culturally acceptable understandings of leaders and knowledge-workers.     

A simple mean–dispersion model of ambiguity attitudes

Several characterizations of ambiguity aversion decompose preferences into the expected utility of an act and an adjustment factor, an ambiguity index, or a dispersion function. In each of these cases, the adjustment factor has very little structure imposed on it, and thus these models provide little guidance as to which function to use from the infinite class of possible alternatives. In this paper, we provide a simple axiomatic characterization of mean–dispersion preferences which uniquely determines a subjective probability distribution over a set of possible priors and which uniquely identifies the dispersion function. We provide an algorithm for determining this subjective probability distribution and the coefficient in the dispersion function from experimental data. We also demonstrate that the model accommodates ambiguity aversion in the Ellsberg paradox.     

The principal-agent problem with smooth ambiguity

We study a principal-agent model in which the (effort-dependent) realisation of output levels is ambiguous, and the agent is ambiguity averse (while the principal is ambiguity neutral). We show that introducing ambiguity aversion will lower profits if the action that the principal wants to implement is the most ambiguous one, while they may increase otherwise. Regarding the design of the optimal contract, we show that under ambiguity aversion the optimal incentive scheme may not be monotone even if a natural generalization of the monotone likelihood ratio property is satisfied, and illustrate how this fact could affect the design of contracts in an applied economic context. We also find that the individual rationality constraint need not bind in the presence of ambiguity aversion unless preferences satisfy constant absolute ambiguity aversion.     

Crisp monetary acts in multiple-priors models of decision under ambiguity

In axiomatic models of decision under ambiguity using a set of priors, a clear distinction can be made between acts which are affected by ambiguity and those which are not: the crisp acts. In these multiple-priors models, the decision maker is indifferent between holding a constant act or holding a non constant crisp act with the same expected utility, if it exists. In financial settings, we show that this indifference, together with the standard definition of monetary acts in the Anscombe–Aumann framework, implies that the investor ignores the variance of some assets, a behavior which conflicts with the assumption on which modern portfolio theory has been built. In this paper we establish the geometrical and topological properties of the set of priors that rule out the existence of non constant crisp acts. These properties in turn restrict what can possibly be an unambiguous financial asset.     

Heterogeneous ambiguity attitudes: a field experiment among small-scale stock investors in China

We conducted quasi-field experiments in Chinese brokerage houses to investigate how investors react to ambiguity relative to quantifiable risks and the degree of heterogeneity in these reactions. Our experiment consists of three sections; a background survey; individual self-reports of emotional states; and a series of individual portfolio choice questions involving ambiguous assets and assets with a known probability of success. We calculate an index of ambiguity aversion that controls for risk aversion through a series of simple choices and demonstrate its outside validity. We find a significant degree of heterogeneity in ambiguity attitudes and discuss some demographic or emotional factors that might contribute to this heterogeneity. We also discuss the correlation between ambiguity attitudes and risk attitudes. By conducting these experiments in China, we were able to measure the degree of ambiguity aversion among a sample of experienced and accessible investors who face ambiguous decisions on a daily basis.     

Equilibrium theory under ambiguity

We extend the classical results on the Walras–core existence and equivalence to an ambiguous asymmetric information economy; that is, an economy where agents maximize Maximin Expected Utility (MEU). The interest of considering ambiguity arises from the fact that, in the presence of MEU decision making, there is no conflict between efficiency and incentive compatibility (contrary to the Bayesian decision making). Our new modeling of an ambiguous asymmetric information economy necessitates new equilibrium notions, which are always efficient and incentive compatible.     

Regular economies with ambiguity aversion

We consider a family of exchange economies with complete markets where consumers have multiprior preferences representing their ambiguity aversion. Under a linear independence assumption, we prove that regular economies are generic. Regular economies exhibit enjoyable properties: odd finite number of equilibrium prices, local constancy of this number, local differentiable selections of the equilibrium prices.Thus, even if ambiguity aversion is represented by non-differentiable multiprior preferences, economies retain generically the properties of the differentiable approach.     

Cross-sectional implications of dynamic asset pricing with stochastic volatility and ambiguity aversion

Building on recent research that highlights the importance of macroeconomic volatility and ambiguity aversion in explaining the dynamics of stock returns, in this paper we propose a dynamic asset pricing model that simultaneously accounts for stochastic macroeconomic volatility and ambiguity, assuming that investors deal with uncertainty about the mechanics of macroeconomic fluctuations using first-release consumption and revisions to aggregate consumption on vintage data. Our results show that the proposed model captures a large fraction of the cross-sectional variation of excess returns for a wide range of market anomaly portfolios. Furthermore, while the price of risk for ambiguity is positive and significant for the vast majority of assets under study, macroeconomic volatility yields ambiguous outcomes, although it significantly increases the explanatory power of the model for specific assets. Our results suggest that macroeconomic volatility and ambiguity complement each other in explaining the cross-sectional behavior of stock returns.     

Optimal investment and reinsurance policies for an insurer with ambiguity aversion

In this paper, we study the optimal investment and reinsurance problem for an insurer based on the variance premium principle, in which three cases are considered. First, we assume that the financial market does not exist. The insurer only holds an insurance business, and the optimal reinsurance problem is studied. Subsequently, we assume that there exists a financial market with an accurately modeled risky asset. The optimal investment and reinsurance problem is investigated under these conditions. Finally, we consider the general case in which the insurer is concerned about the model ambiguity of both the insurance market and the financial market. In all three cases, the value function is set to maximize the expected utility of terminal wealth. By employing the dynamic programming principle, we derive the Hamilton–Jacobi–Bellman (HJB) equations, which are satisfied by the value functions and obtain closed-form solutions for optimal reinsurance and investment policies and the value functions in all three cases. Most interestingly, we elucidate how investment improves the insurer’s utility and find that the existence of ambiguity can significantly affect the optimal policies and value functions. We also compare the ambiguities in the two markets and find that ambiguity in the insurance market has much more significant impact on the value function than the ambiguity in the financial market. It implies that it is more valuable for insurer to precisely evaluate the insurance risk. We also provide some numerical examples and economic explanations to illustrate our results.     

Propensity for hedging and ambiguity aversion

We study ambiguity aversion by introducing some new notions of propensity for hedging that are less general than convexity of preferences. We therefore characterize the corresponding properties of the capacity and Choquet functional, and link them with actual observed behaviors under uncertainty (Fox et al., 1996; Tversky and Wakker, 1995).     

Mixed signals: employee reactions to talent status communication amidst strategic ambiguity

Abstract

Given the sensitive nature of communicating talent status in an ‘exclusive’ talent management system and the complexity involved in simultaneously sending signals of exclusivity and inclusivity, some organisations avoid open communication and instead opt for ‘strategic ambiguity’ – intentionally maintaining an element of secrecy and information asymmetry. However, we know relatively little about the effects of this communication approach as a feature of the organisational context on the reactions of employees. Drawing on signalling theory, we examine the reactions of both talents and ‘B’ players on finding out about their talent status in the context of a company that adopts strategic ambiguity in its communication about talent. The data consists of 24 in-depth, qualitative interviews with individuals with experience of TM in a Finnish subsidiary of a large, US-based multinational corporation. The findings reveal that the contextual effects of strategic ambiguity in talent communication affected the reactions of talents and ‘B’ players in distinctly different ways, but had few long-term positive effects on the attitudes and behaviours of either group. These findings present important theoretical and practical implications for the role of communication and organisational context in employee reactions to talent pool inclusion and for talent management more generally.     

Dynamic portfolio choice under ambiguity and regime switching mean returns

I examine a continuous-time intertemporal consumption and portfolio choice problem under ambiguity, where expected returns of a risky asset follow a hidden Markov chain. Investors with Chen and Epstein's (2002) recursive multiple priors utility possess a set of priors for unobservable investment opportunities. The optimal consumption and portfolio policies are explicitly characterized in terms of the Malliavin derivatives and stochastic integrals. When the model is calibrated to U.S. stock market data, I find that continuous Bayesian revisions under incomplete information generate ambiguity-driven hedging demands that mitigate intertemporal hedging demands. In addition, ambiguity aversion magnifies the importance of hedging demands in the optimal portfolio policies. Out-of-sample experiments demonstrate the economic importance of accounting for ambiguity.     

Incomplete markets, ambiguity, and irreversible investment

The problem of irreversible investment with idiosyncratic risk is studied by interpreting market incompleteness as a source of ambiguity over the appropriate no-arbitrage discount factor. The maxmin utility over multiple priors framework is used to model and solve the irreversible investment problem. Multiple priors are modeled using the notion of κ‐ignorance. This set-up is used to analyze finitely lived options. For infinitely lived options the notion of constant κ‐ignorance is introduced. For these sets of density generators the corresponding optimal stopping problem is solved for general (in-)finite horizon optimal stopping problems driven by geometric Brownian motion. It is argued that an increase in the set of priors delays investment, whereas an increase in the degree of market completeness can have a non-monotonic effect on investment.     

Interpretations of stress in institutions: the cultural production of ambiguity and burnout

This ethnographic study of interpretations of stress among hospital social workers reveals concrete ways in which institutional systems take form in the mundane actions and interpretations of individuals embedded in these systems. It also reveals how organizational cultures reflect and reinforce institutional conditions that have been negotiated in the interactions of individuals. Here, the institutional systems of medicine and social work come together in the everyday work of the social workers and result in two patterns of cultural dominance. Within these distinct types of culture emerge two forms of stress experience, including a dominant form, consistent with medical ideology, and a marginalized form, consistent with social work ideology. Some surprising patterns of interpretation emerge, including interpretations of ambiguity and burnout as normal, social, and desirable when the social work ideology is dominant. This institutional analysis of stress has theoretical, practical, and epistemological implications.     

Ambivalence and ambiguity in social enterprise; narratives about values in reconciling purpose and practices

Social enterprises are unusual change organizations; typically their purpose is to bring about change to improve social well-being. Yet they do so in unusual ways. Traditional entrepreneurs generate social value as a by-product of economic value; whereas for social entrepreneurs the reverse is true. This brings about an ambiguity in integrating business and social well being, most manifest in identity and in managing the enterprise. Moreover, the values which drive social enterprise are “different”. Consequently, we examine how values shape practices and how they give direction and purpose to what social enterprises do and how this shapes identity over time. Using the social organisation as the unit of analysis, we collected the narratives about tensions and how these were reconciled. We contribute by improving our understanding of social enterprise by showing how values are worked, used and deployed to give direction in reconciling ambiguity. Moreover, these ambiguities provide a unique identity and purpose for social enterprise.     

“Agreeing to disagree” type results under ambiguity

This paper characterizes conditions under which it is impossible for non-Bayesian agents to “agree to disagree” on their individual decisions. The agents are Choquet expected utility maximizers. Whenever each agent’s information partition is composed of unambiguous events in the sense of Nehring (1999), then the agents cannot disagree on the common knowledge decisions, whether these decisions are conditional capacities or conditional Choquet expectations. Conversely, an agreement on conditional Choquet expectations, but not on conditional capacities, implies that each agent’s private information must consist of Nehring-unambiguous events. These results indicate that under ambiguity–contrary to the standard Bayesian framework–asymmetric information matters, and it can explain differences in common knowledge decisions due to the ambiguous nature of the agents’ private information.     

How does cultural intelligence affect organisational culture: the mediating role of cross-cultural role conflict,ambiguity, and overload

Drawing on the tenets of role stress theory for insight into the cross-cultural and relational effects of role stressors, adaptability and organisation, we explain the mediating effect of these stressors to identify the extent of relationships across a broad scope of cultural settings. The current study examines cross-cultural role conflict, ambiguity and overload – the three role stressors – as mediators of the relationship between cultural intelligence and organisational culture. Survey data were collected from 299 employees across high-risk industries in four countries: Australia, the United Kingdom, United States of America and Singapore. Results demonstrated that cultural intelligence is positively related to organisational culture, while cross-cultural role conflict, ambiguity and overload are negatively associated with organisational culture. Moreover, results from mediation analysis highlighted that cross-cultural role conflict, ambiguity and overload partially mediate the relationship between cultural intelligence and organisational culture, providing a broader understanding of its connective influence both locally and in a cross-border setting. Implications for theory and managerial practice, along with avenues for future research, are discussed.     

Equilibrium mean–variance reinsurance and investment strategies for a general insurance company under smooth ambiguity

This work investigates the equilibrium investment and reinsurance strategies for a general insurance company under smooth ambiguity. The general insurance company holds shares of an insurance company and a reinsurance company. The claims of the insurer follow a compound Poisson process. The insurer can divide part of the insurance risk to the reinsurer. Besides, the insurer and reinsurer both participate in the financial market and invest in cash and stock. However, the general insurance company is ambiguous about the insurance and financial risks and is an ambiguity-averse manager (AAM). The uncertainties over the insurance and financial risks are described by second-order distributions. The AAM aims to maximize the average performance of the weighted sum surplus process of the insurer and reinsurer under the mean–variance criterion and smooth ambiguity. We present the extended Hamilton–Jacobi–Bellman (HJB) system for the optimization problem combining the mean–variance criterion and smooth ambiguity. In the case that the second-order distributions are Gaussian, we obtain the closed-forms of the equilibrium reinsurance and investment strategies. At the end of this work, sensitivity analyses are presented to show the economic behaviors of the AAM.