Scale-invariant uncertainty-averse preferences and source-dependent constant relative risk aversion
AbstractPreferences 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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Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 8 (2013)
Issue (Month): 1 (January)
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Web page: http://econtheory.org
Uncertainty aversion; ambiguity aversion; source-dependent risk aversion; scale invariance; homotheticity;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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