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Scale-invariant uncertainty-averse preferences and source-dependent constant relative risk aversion

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  • Skiadas, Costis

    ()
    (Kellogg School of Management, Northwestern University)

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    Abstract

    Preferences are defined over payoffs that are contingent on a finite number of states representing a horse race (Knightian uncertainty) and a roulette (objective risk). The class of scale-invariant (SI) ambiguity-averse preferences, in a broad sense, is uniquely characterized by a multiple-prior utility representation. Adding a weak certainty independence axiom is shown to imply either unit CRRA toward roulette risk or SI maxmin expected utility. Removing the weak independence axiom but adding a separability assumption on preferences over pure horse-race bets leads to source-dependent constant-relative-risk-aversion expected utility with a higher CRRA assigned to horse-race uncertainty than to roulette risk. The multiple-prior representation in this case is shown to generalize entropic variational preferences. An appendix characterizes the functional forms associated with SI ambiguity-averse preferences in terms of suitable weak independence axioms in place of scale invariance.

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    File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20130059/8130/247
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    Bibliographic Info

    Article provided by Econometric Society in its journal Theoretical Economics.

    Volume (Year): 8 (2013)
    Issue (Month): 1 (January)
    Pages:

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    Handle: RePEc:the:publsh:1004

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    Web page: http://econtheory.org

    Related research

    Keywords: Uncertainty aversion; ambiguity aversion; source-dependent risk aversion; scale invariance; homotheticity;

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    1. Tomasz Strzalecki, 2011. "Axiomatic Foundations of Multiplier Preferences," Levine's Working Paper Archive 786969000000000126, David K. Levine.
    2. Chateauneuf, Alain & Faro, José Heleno, 2009. "Ambiguity through confidence functions," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 535-558, September.
    3. Cerreia-Vioglio, S. & Maccheroni, F. & Marinacci, M. & Montrucchio, L., 2011. "Uncertainty averse preferences," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1275-1330, July.
    4. Debreu,Gerard Introduction by-Name:Hildenbrand,Werner, 1986. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521335614, November.
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