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On the Smooth Ambiguity Model: A Reply

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  • Peter Klibanoff
  • Massimo Marinacci
  • Sujoy Mukerji

Abstract

We find that Epstein (2010)'s Ellsberg-style thought experiments pose, contrary to his claims, no paradox or difficulty for the smooth ambiguity model of decision making under uncertainty developed by Klibanoff, Marinacci and Mukerji (2005). Not only are the thought experiments naturally handled by the smooth ambiguity model, but our reanalysis shows that they highlight some of its strengths compared to models such as the maxmin expected utility model (Gilboa and Schmeidler (1989)). In particular, these examples pose no challenge to the model's foundations, interpretation of the model as affording a separation of ambiguity and ambiguity attitude or the potential for calibrating ambiguity attitude in the model.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 410.

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Date of creation: 2011
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Handle: RePEc:igi:igierp:410

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  1. William Neilson, 2010. "A simplified axiomatic approach to ambiguity aversion," Journal of Risk and Uncertainty, Springer, Springer, vol. 41(2), pages 113-124, October.
  2. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2004. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Carlo Alberto Notebooks, Collegio Carlo Alberto 12, Collegio Carlo Alberto, revised 2006.
  3. Amarante, Massimiliano, 2009. "Foundations of neo-Bayesian statistics," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2146-2173, September.
  4. Uzi Segal & Avia Spivak, 1988. "First Order Versus Second Order Risk Aversion," UCLA Economics Working Papers, UCLA Department of Economics 540, UCLA Department of Economics.
  5. Marciano Siniscalchi, 2007. "Vector Expected Utility and Attitudes toward Variation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1455, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Robert F. Nau, 2006. "Uncertainty Aversion with Second-Order Utilities and Probabilities," Management Science, INFORMS, INFORMS, vol. 52(1), pages 136-145, January.
  7. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  8. Larry Epstein & Martin Schneider, 2002. "IID: Independently and Indistinguishably Distributed," RCER Working Papers 496, University of Rochester - Center for Economic Research (RCER).
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Cited by:
  1. Massimo Guidolin & Francesca Rinaldi, 2010. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Working Papers 2010-028, Federal Reserve Bank of St. Louis.
  2. Noemi Pace & Giuseppe Attanasi & Christian Gollier & Aldo Montesano, 2012. "Eliciting ambiguity aversion in unknown and in compound lotteries: A KMM experimental approach," Working Papers 2012_23, Department of Economics, University of Venice "Ca' Foscari".
  3. Gonçalo Faria & João Correia-da-Silva, 2014. "A closed-form solution for options with ambiguity about stochastic volatility," Review of Derivatives Research, Springer, Springer, vol. 17(2), pages 125-159, July.
  4. Giraud, Raphaël, 0. "Second order beliefs models of choice under imprecise risk: non-additive second order beliefs vs. nonlinear second order utility," Theoretical Economics, Econometric Society, Econometric Society.
  5. Sujoy Mukerji & Robin Cubitt & Gijs van de Kuilen, 2014. "Discriminating between Models of Ambiguity Attitude: A Qualitative Test," Economics Series Working Papers 692, University of Oxford, Department of Economics.
  6. Robert Nau, 2011. "Risk, ambiguity, and state-preference theory," Economic Theory, Springer, Springer, vol. 48(2), pages 437-467, October.
  7. Dominiak, Adam & Schnedler, Wendelin, 2010. "Attitudes towards Uncertainty and Randomization: An Experimental Study," Working Papers 0494, University of Heidelberg, Department of Economics.

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