Ambiguity in the small and in the large
AbstractThis paper considers local and global multiple-prior representations of ambiguity for preferences that are (i) monotonic, (ii) Bernoullian, i.e. admit an affine utility representation when restricted to constant acts, and (iii) locally Lipschitz continuous. We do not require either Certainty Independence or Uncertainty Aversion. We show that the set of priors identified by Ghirardato, Maccheroni, and Marinacci (2004)’s ‘unambiguous preference’ relation can be characterized as a union of Clarke differentials. We then introduce a behavioral notion of ‘locally better deviation’ at an act, and show that it characterizes the Clarke differential of the preference representation at that act. These results suggest that the priors identified by these preference statements are directly related to (local) optimizing behavior.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 255.
Length: 34 pages
Date of creation: 2012
Date of revision:
Ambiguity; Optimization; Robustness; Derivative.;
Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-EVO-2012-07-01 (Evolutionary Economics)
- NEP-MIC-2012-07-01 (Microeconomics)
- NEP-UPT-2012-07-01 (Utility Models & Prospect Theory)
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- Daniele Pennesi, 2013. "Endogenous Status Quo," Carlo Alberto Notebooks 314, Collegio Carlo Alberto.
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- Gollier, Christian & Hammitt, James & Treich, Nicolas, 2013. "Risk and Choice: A Research Saga," IDEI Working Papers 804, Institut d'Économie Industrielle (IDEI), Toulouse.
- Daniele Pennesi, 2013. "Asset Prices in an Ambiguous Economy," Carlo Alberto Notebooks 315, Collegio Carlo Alberto.
- S. Cerreia-Vioglio & F. Maccheroni & M. Marinacci & A. Rustichini, 2014. "The Structure of Variational Preferences," Working Papers 520, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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