Ambiguity aversion and the equity premium puzzle: A re-examination of experimental data on repeated gambles

Benartzi and Thaler [Benartzi, S., Thaler, R.H. (1999). Risk aversion or myopia? Choices in repeated gambles and retirement investments. Management Science 45, 364-381] experimentally study decision makers who are faced with multiple plays of a gamble. While these decision makers may decline the opportunity to play repeated gambles, they may reverse this preference when shown an explicit distribution of the outcomes from the multiple plays. The preference reversal indicates irrationality, and Benartzi and Thaler attribute this irrationality to myopic loss aversion. A re-examination of their experimental results in light of a misinterpreted theoretical motivation for their experiment, and an extensive literature on ambiguity aversion, reveals that ambiguity aversion caused by bounded rationality is an alternative explanation for the reversal.