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Choices Under Ambiguity With Familiar And Unfamiliar Outcomes

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Author Info

  • Marcello Basili

    ()

  • Alain Chateauneuf
  • Fulvio Fontini

Abstract

This paper considers a decision-making process under ambiguity in which the decision-maker is supposed to split outcomes between familiar and unfamiliar ones. She is assumed to behave differently with respect to unfamiliar gains, unfamiliar losses and customary (familiar) outcomes. In particular, she is supposed to be pessimistic on gains, optimistic on losses and ambiguity neutral on the familiar outcomes. A generalization of the usual Choquet Integral is formalized when the decision maker holds capacities and probabilities. A characterization of the decision-maker’s behavior is provided for a specific subset of capacities, in which it is shown that the decision-maker underestimates the unfamiliar outcomes while is linear in probabilities on customary ones. Copyright Springer 2005

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File URL: http://hdl.handle.net/10.1007/s11238-005-5682-6
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Bibliographic Info

Article provided by Springer in its journal Theory and Decision.

Volume (Year): 58 (2005)
Issue (Month): 2 (03)
Pages: 195-207

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Handle: RePEc:kap:theord:v:58:y:2005:i:2:p:195-207

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Web page: http://www.springerlink.com/link.asp?id=100341

Related research

Keywords: ambiguity; capacity; choquet integral; representation theorem; cumulative prospect theory; D81;

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References

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  1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  2. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
  3. Chateauneuf, Alain & Wakker, Peter, 1999. "An Axiomatization of Cumulative Prospect Theory for Decision under Risk," Journal of Risk and Uncertainty, Springer, vol. 18(2), pages 137-45, August.
  4. Dow James & Werlang Sergio Ribeiro Da Costa, 1994. "Nash Equilibrium under Knightian Uncertainty: Breaking Down Backward Induction," Journal of Economic Theory, Elsevier, vol. 64(2), pages 305-324, December.
  5. Lattimore, Pamela K. & Baker, Joanna R. & Witte, Ann D., 1992. "The influence of probability on risky choice: A parametric examination," Journal of Economic Behavior & Organization, Elsevier, vol. 17(3), pages 377-400, May.
  6. Michael Kilka & Martin Weber, 2001. "What Determines the Shape of the Probability Weighting Function Under Uncertainty?," Management Science, INFORMS, vol. 47(12), pages 1712-1726, December.
  7. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  8. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  9. Pamela K. Lattimore & Joanna R. Baker & A. Dryden Witte, 1992. "The Influence Of Probability on Risky Choice: A parametric Examination," NBER Technical Working Papers 0081, National Bureau of Economic Research, Inc.
  10. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-80, November.
  11. Bleichrodt, Han, 2001. " Probability Weighting in Choice under Risk: An Empirical Test," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 185-98, September.
  12. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, 05.
  13. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
  14. Schmidt, Ulrich & Traub, Stefan, 2002. " An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 233-49, November.
  15. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
  16. Han Bleichrodt & Jose Luis Pinto & Peter P. Wakker, 2001. "Making Descriptive Use of Prospect Theory to Improve the Prescriptive Use of Expected Utility," Management Science, INFORMS, vol. 47(11), pages 1498-1514, November.
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Citations

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Cited by:
  1. Basili, Marcello & Chateauneuf, Alain & Fontini, Fulvio, 2008. "Precautionary principle as a rule of choice with optimism on windfall gains and pessimism on catastrophic losses," Ecological Economics, Elsevier, vol. 67(3), pages 485-491, October.
  2. Marcello Basili & Carlo Zappia, 2005. "Ambiguity and uncertainty in Ellsberg and Shackle," Department of Economics University of Siena 460, Department of Economics, University of Siena.
  3. Fontini, Fulvio & Paloscia, Lorenzo, 2007. "The impact of the new investments in combined cycle gas turbine power plants on the Italian electricity price," Energy Policy, Elsevier, vol. 35(9), pages 4671-4676, September.
  4. Fulvio Fontini & Georg Umgiesser & Lucia Vergano, 2008. "The Role of Ambiguity in the Evaluation of the Net Benefits of the MOSE System in the Venice Lagoon," "Marco Fanno" Working Papers 0080, Dipartimento di Scienze Economiche "Marco Fanno".
  5. José Lara Resende & George Wu, 2010. "Competence effects for choices involving gains and losses," Journal of Risk and Uncertainty, Springer, vol. 40(2), pages 109-132, April.
  6. Xiaoxian Ma & Qingzhen Zhao & Jilin Qu, 2008. "Robust portfolio optimization with a generalized expected utility model under ambiguity," Annals of Finance, Springer, vol. 4(4), pages 431-444, October.

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