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Confidence and ambiguity

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  • Hill, Brian

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Abstract

This paper proposes a model of the decision-maker’s confidence in his probability judgements, in terms of an implausibility measure – a real-valued function on the set of probability functions. A decision rule is axiomatised according to which the decision-maker evaluates acts using sets of probability functions which vary depending on the agent’s implausibility measure and on what is at stake in the choice of the act. The framework proposed yields a natural notion of comparative aversion to lack of confidence, or ambiguity aversion, and allows the definition of an ambiguity premium. It is shown that these notions are equivalent and can be characterised in terms of the implausibility measure representing the agent’s confidence. A simple portfolio example is presented.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 914.

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Length: 25 pages
Date of creation: 20 Feb 2009
Date of revision:
Handle: RePEc:ebg:heccah:0914

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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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Related research

Keywords: Confidence; multiple priors; ambiguity aversion; ambiguity premium; implausibility measure;

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References

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  1. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
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Cited by:
  1. Hill, Brian, 2009. "Confidence in preferences," Les Cahiers de Recherche 919, HEC Paris.

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