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A Bayesian Approach to Uncertainty Aversion

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  • Yoram Halevy
  • Vincent Feltkamp

Abstract

The Ellsberg paradox demonstrates that people's beliefs over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of several positively correlated problems, she will be uncertainty averse. We generalize this argument and derive sufficient conditions for uncertainty aversion. Copyright 2005, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2005.00339.x
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 72 (2005)
Issue (Month): 2 ()
Pages: 449-466

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Handle: RePEc:oup:restud:v:72:y:2005:i:2:p:449-466

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  1. Machina, Mark J & Schmeidler, David, 1992. "A More Robust Definition of Subjective Probability," Econometrica, Econometric Society, Econometric Society, vol. 60(4), pages 745-80, July.
  2. Hoffman, Elizabeth & McCabe, Kevin & Smith, Vernon L, 1996. "Social Distance and Other-Regarding Behavior in Dictator Games," American Economic Review, American Economic Association, American Economic Association, vol. 86(3), pages 653-60, June.
  3. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, Elsevier, vol. 2(3), pages 225-243, September.
  4. Aumann, Robert J., 1997. "Rationality and Bounded Rationality," Games and Economic Behavior, Elsevier, Elsevier, vol. 21(1-2), pages 2-14, October.
  5. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  6. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 325-70, October.
  7. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, Econometric Society, vol. 55(1), pages 95-115, January.
  8. Uzi Segal, 1985. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," UCLA Economics Working Papers, UCLA Department of Economics 362, UCLA Department of Economics.
  9. Sarin, R. & Wakker, P.P., 1996. "A Single-Stage Approach to Anscombe and Aumann's Expected Utility," Discussion Paper, Tilburg University, Center for Economic Research 1996-45, Tilburg University, Center for Economic Research.
  10. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 18(2), pages 141-153, April.
  11. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 16(1), pages 65-88, February.
  12. Larry Epstein, 1997. "Uncertainty Aversion," Working Papers, University of Toronto, Department of Economics epstein-97-01, University of Toronto, Department of Economics.
  13. Sarin, Rakesh K & Wakker, Peter, 1992. "A Simple Axiomatization of Nonadditive Expected Utility," Econometrica, Econometric Society, Econometric Society, vol. 60(6), pages 1255-72, November.
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Cited by:
  1. Eric Rasmusen, 2008. "Career Concerns and Ambiguity Aversion," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2008-12, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Rick Harbaugh, 2005. "Prospect Theory or Skill Signaling?," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2005-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Zvi Safra & Uzi Segal, 2005. "Are Universal Preferences Possible? Calibration Results for Non-Expected Utility Theories," Boston College Working Papers in Economics, Boston College Department of Economics 633, Boston College Department of Economics.
  4. Pierre Fleckinger, 2007. "On Multiagent Moral Hazard under Technological Uncertainty," Working Papers, HAL hal-00240716, HAL.
  5. repec:clg:wpaper:2013-27 is not listed on IDEAS
  6. Gregory DeAngelo & Gary Charness, 2012. "Deterrence, expected cost, uncertainty and voting: Experimental evidence," Journal of Risk and Uncertainty, Springer, Springer, vol. 44(1), pages 73-100, February.
  7. Takashi Kamihigashi & John Stachurski, 2014. "Partial Stochastic Dominance," Working Papers, Department of Research, Ipag Business School 2014-403, Department of Research, Ipag Business School.
  8. Mark Dean & Pietro Ortoleva, 2012. "Allais, Ellsberg, and Preferences for Hedging," Working Papers, Brown University, Department of Economics 2012-2, Brown University, Department of Economics.
  9. Alfred Müller & Marco Scarsini, 2002. "Even Risk-Averters may Love Risk," Theory and Decision, Springer, Springer, vol. 52(1), pages 81-99, February.
  10. Al-Najjar, Nabil I. & Weinstein, Jonathan, 2013. "A Bayesian Model of Knightian Uncertainty," Economics Series, Institute for Advanced Studies 300, Institute for Advanced Studies.
  11. Yang, Chun-Lei & Yao, Lan, 2011. "Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence," MPRA Paper 28531, University Library of Munich, Germany.
  12. Christoph Kuzmics, 2012. "Inferring preferences from choices under uncertainty," Working Papers, Bielefeld University, Center for Mathematical Economics 462, Bielefeld University, Center for Mathematical Economics.

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