Ambiguity and Decision Modeling: A Preference-Based Approach
AbstractIn this article, we develop a model that permits a decision maker's preferences to depend on the decision maker's ambiguity about the probability of an event that is relevant for decision-making purposes. We deal with ambiguity about the probability through preference modeling, with ambiguity leading to modifications in the utilities of outcomes. The behavior of ambiguity premiums and probability premiums as the payoffs are varied depends on the nature of the modifications in utilities. Particular forms of the model that arise under different sets of assumptions about preferences include additive, bilinear, and ratio forms. We conclude with a brief example and some thoughts about potential generalizations and implications of the model. Copyright 1992 by Kluwer Academic Publishers
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Bibliographic InfoArticle provided by Springer in its journal Journal of Risk and Uncertainty.
Volume (Year): 5 (1992)
Issue (Month): 4 (October)
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- Matthew Rabin, 1998.
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- Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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- Ali Ahmed & Göran Skogh, 2006. "Choices at various levels of uncertainty: An experimental test of the restated diversification theorem," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 183-196, December.
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