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Probabilistic sophistication, second order stochastic dominance and uncertainty aversion

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  • Cerreia-Vioglio, Simone
  • Maccheroni, Fabio
  • Marinacci, Massimo
  • Montrucchio, Luigi

Abstract

We study the interplay of probabilistic sophistication, second order stochastic dominance and uncertainty aversion, three fundamental notions in choice under uncertainty. In particular, our main result, Theorem 2, characterizes uncertainty averse preferences that are probabilistically sophisticated, as well as uncertainty averse preferences that satisfy second order stochastic dominance. As a byproduct, Proposition 2 highlights a fundamental tension between probabilistic sophistication/second order stochastic dominance and uncertainty aversion in the presence of nontrivial unambiguous events.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 48 (2012)
Issue (Month): 5 ()
Pages: 271-283

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Handle: RePEc:eee:mateco:v:48:y:2012:i:5:p:271-283

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Model misspecification; Probabilistic sophistication; Second order stochastic dominance; Subjective expected utility; Unambiguous events; Uncertainty aversion;

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Cited by:
  1. Cerreia-Vioglio, Simone & Maccheroni, Fabio & Marinacci, Massimo & Montrucchio, Luigi, 2013. "Ambiguity and robust statistics," Journal of Economic Theory, Elsevier, vol. 148(3), pages 974-1049.
    • Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Luigi Montrucchio, 2011. "Ambiguity and Robust Statistics," Working Papers 382, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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