Financial

Running Head: Financial Ambiguity

Angela Pitcher

MBA 632: Measurement 2

Dr. Adam Guerrero

Northwood University

March 25, 2011

Financial systems contain a plethora of ambiguity samples. The most prevalent model for me is the uncertainty of learning problems in Finance Measurement and the different interpretations. (Easley and OHara pg1) Suggest that” Research in finance has increasingly turned to investigating alternatives to the standard model of investor behavior. In the standard model, investors are assumed to be extraordinarily rational: they act as if they maximize expected utility using rational, or correct, expectations. But a growing body of empirical evidence suggests that asset pricing behavior is not well described by this traditional paradigm. One direction taken in the literature is behavioral finance, where the rationality of the investor is replaced by any number of psychology-based alternatives.”

(Ford, Kelsey and Pang pg2) Discuss “Herding in financial markets has been explored extensively in recent years. The main focus has been on forms of rational herding: informational herding, reputation-based and compensation-based herding. In this paper we con.ne our attention to informational herding in financial markets. We demonstrate that ambiguity can cause the occurrence of herding, as well as contrarian behavior. Ambiguity, first defined by Knight (1921), refers to situations where subjective probabilities

are not perfectly known or even unknown. Ambiguity arises from sources such as missing information or disagreement of expert opinions or the lack of confidence on the information quality. Cumulative evidence from laboratory experiments has suggested that behavior under ambiguity is different from behavior under risk, such as the Ellsberg Paradox (1961): see, for example,

Camerer and Weber (1992). It has been argued that financial market is a likely candidate for considering the effects of ambiguity.”

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