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A dual approach to ambiguity aversion

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  • Bommier, Antoine

Abstract

In the present paper, the assumption of monotonicity of Anscombe and Aumann (1963) is replaced by an assumption of monotonicity with respect to first-order stochastic dominance. This yields a representation result where ambiguous distributions of objective beliefs are first aggregated into “equivalent unambiguous beliefs” and then risk preferences are used to compute the utility of these equivalent unambiguous beliefs. Such an approach makes it possible to disentangle uncertainty aversion, related to the processing of information, from risk aversion, related to the evaluation of the equivalent unambiguous beliefs. An application to portfolio choice shows the tractability of the framework and its intuitive appeal.

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  • Bommier, Antoine, 2017. "A dual approach to ambiguity aversion," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 104-118.
    • Handle: RePEc:eee:mateco:v:71:y:2017:i:c:p:104-118
    DOI: 10.1016/j.jmateco.2017.05.003
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    Cited by:

    1. Christoph Kuzmics & Brian W. Rogers & Xiannong Zhang, 2023. "Randomization advice and ambiguity aversion," Graz Economics Papers 2023-01, University of Graz, Department of Economics.
    2. Mohammed Abdellaoui & Horst Zank, 2023. "Source and rank-dependent utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(4), pages 949-981, May.
    3. Florian H. Schneider & Martin Schonger, 2019. "An Experimental Test of the Anscombe–Aumann Monotonicity Axiom," Management Science, INFORMS, vol. 65(4), pages 1667-1677, April.
    4. Izhakian, Yehuda, 2017. "Expected utility with uncertain probabilities theory," Journal of Mathematical Economics, Elsevier, vol. 69(C), pages 91-103.
    5. Michel Grabisch & Benjamin Monet & Vassili Vergopoulos, 2023. "Subjective expected utility through stochastic independence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 723-757, October.
    6. Li, Chen & Turmunkh, Uyanga & Wakker, Peter P., 2020. "Social and strategic ambiguity versus betrayal aversion," Games and Economic Behavior, Elsevier, vol. 123(C), pages 272-287.
    7. Mohammed Abdellaoui & Horst Zank, 2022. "Source and Rank-dependent Utility," Post-Print hal-03924295, HAL.
    8. Stefan Trautmann & Peter P. Wakker, 2018. "Making the Anscombe-Aumann approach to ambiguity suitable for descriptive applications," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 83-116, February.
    9. Ghirardato, Paolo & Pennesi, Daniele, 2020. "A general theory of subjective mixtures," Journal of Economic Theory, Elsevier, vol. 188(C).

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    More about this item

    Keywords

    Ambiguity aversion; First-order stochastic dominance; Separability; Comonotonic sure-thing principle; Rank-dependent utility; Portfolio choice;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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