Group Polarization Stydy Of Investment Decisions Under Ambiguity

The biggest feature of post crisis era is uncertainty. According to Knight’s (1921) definition, uncertainty can be further divided into known probability and unknown probability. The former is also defined as risk while the latter is ambiguity. Investors tend to calculate the potential risks of an investment plan with all kinds of financial analyzing tools and forecast its future value. Based on these work, investors make investment decisions. However, the ambiguity of the financial market raises the difficulty of analyzing and forecasting. Therefore, to study the decision making under ambiguity is of great practical significance.Modern finance theory is built on two hypotheses:rational investors and sufficient market information. However, the emergence of more and more abnormal phenomena leads to reconsideration of the two hypotheses. With the findings of philosophy, sociology, and other related subjects, behavioral finance has posed great challenge to the two hypotheses. Behavioral finance holds the opinion that due to the insufficient information and bounded rationality investors do have biases in the investment practice. Among all, ambiguity aversion is one. Ambiguity aversion refers to the inclination that people tend to choose risky investment plan which has a certain probability while avoid the ambiguous one. Therefore, investors may make wrong decisions when they ignore the potential value because of ambiguity.In financial practice, many investment decisions are made by groups. For example, institutional investors take an important role in financial market. However, seldom do they attract academic attention. Group decision will not only be influenced by irrational members, but also bear its unique irrational factors, for example group polarization. Group polarization refers to the phenomenon that compared with individuals, groups are more likely to make extreme decisions. These more extreme decisions are towards greater risk if individual’s initial tendency is to be risky and towards greater caution if individual’s initial tendency is to be cautious. Therefore, group decision may intensify ambiguity aversion or may eliminate its impact with information exchange.The study adopts experimental method to explore the group polarization in investment decisions under ambiguity. Through experiment, this paper finds that ambiguity aversion exists in both individual decisions and group decisions. Faced with risky decision and ambiguous decision, investors tend to choose the risky one. While facing two ambiguous decisions, investors incline to choose the one he or she is more familiar with. The paper also finds group polarization in group decisions, with risky shift dominant in risky decision while cautious shift dominant in ambiguous decision. These findings remind investors of the potential impact of ambiguity aversion in decision making, especially for the decision-making groups. How to correctly view the polarization and adopt reasonable measures to avoid its negative impact is of great importance.