Reference dependent ambiguity

Motivated by experimental and empirical evidence, I study a framework where reference-points – such as a status quo, endowment, or default option – can distort the way an individual responds to ambiguity. I characterize a model of reference-dependent maxmin expected utility, and provide behavioral foundations for comparing reference-dependent ambiguity attitudes. I also illustrate some implications of reference-dependent ambiguity for trade in an asset market, including underdiversification, no-trade, and the potential for a market collapse.