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Relative concave utility for risk and ambiguity

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  • Baillon, Aurélien
  • Driesen, Bram
  • Wakker, Peter P.

Abstract

This paper presents a general technique for comparing the concavity of different utility functions when probabilities need not be known. It generalizes: (a) Yaariʼs comparisons of risk aversion by not requiring identical beliefs; (b) Kreps and Porteusʼ information-timing preference by not requiring known probabilities; (c) Klibanoff, Marinacci, and Mukerjiʼs smooth ambiguity aversion by not using subjective probabilities (which are not directly observable) and by not committing to (violations of) dynamic decision principles; (d) comparative smooth ambiguity aversion by not requiring identical second-order subjective probabilities. Our technique completely isolates the empirical meaning of utility. It thus sheds new light on the descriptive appropriateness of utility to model risk and ambiguity attitudes.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 75 (2012)
Issue (Month): 2 ()
Pages: 481-489

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Handle: RePEc:eee:gamebe:v:75:y:2012:i:2:p:481-489

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Web page: http://www.elsevier.com/locate/inca/622836

Related research

Keywords: More risk averse; More ambiguity averse; Knightian uncertainty; Subjective probability; Nonexpected utility;

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References

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Citations

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Cited by:
  1. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
  2. Ulrich Schmidt & Horst Zank, 2011. "A Genuine Foundation for Prospect Theory," The School of Economics Discussion Paper Series 1114, Economics, The University of Manchester.
  3. Berger, Loïc & Bleichrodt, Han & Eeckhoudt, Louis, 2013. "Treatment decisions under ambiguity," Journal of Health Economics, Elsevier, vol. 32(3), pages 559-569.
  4. Mohammed Abdellaoui & Ahmed Driouchi & Olivier L’Haridon, 2011. "Risk aversion elicitation: reconciling tractability and bias minimization," Theory and Decision, Springer, vol. 71(1), pages 63-80, July.

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