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Flexibility of Choice Versus Reduction of Ambiguity

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  • Ani Guerdjikova
  • Alexander Zimper

Abstract

This paper explores the problem of a social planner willing to improve the welfare of individuals who are unable to compare all available alternatives. The optimal decision trades off the individuals' desire for flexibility versus their aversion towards ambiguous choice situations. We introduce an axiom system that formalizes this idea. Our main result characterizes the preference maximizing opportunity set. It is a maximal set that consists of mutually comparable alternatives. It also has the property that it maximizes the sum of the distances between its ordered elements for some appropriate metric imposed on the set of possible choices.

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Bibliographic Info

Paper provided by Economic Research Southern Africa in its series Working Papers with number 40.

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Length: 26 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:rza:wpaper:40

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Keywords: Incomplete preferences; ambiguity; ?exibility of choice; opportunity sets; uncertainty;

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References

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  1. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, 01.
  2. Karni, Edi & Safra, Zvi, 1990. "Behaviorally consistent optimal stopping rules," Journal of Economic Theory, Elsevier, vol. 51(2), pages 391-402, August.
  3. Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Eric Danan & Anthony Ziegelmeyer, 2004. "Are preferences incomplete? An experimental study using flexible choices," Papers on Strategic Interaction 2004-23, Max Planck Institute of Economics, Strategic Interaction Group.
  5. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  6. Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 2005. "Temptation–Driven Preferences," Boston University - Department of Economics - Working Papers Series WP2005-005, Boston University - Department of Economics.
  7. Ludwig, Alexander & Zimper, Alexander, 2004. "Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers," Sonderforschungsbereich 504 Publications 04-31, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  8. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
  9. Klaus Nehring, 1999. "Preference for Flexibility in a Savage Framework," Econometrica, Econometric Society, vol. 67(1), pages 101-120, January.
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Citations

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Cited by:
  1. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  2. Eric Danan & Ani Guerdjikova & Alexander Zimper, 2012. "Indecisiveness aversion and preference for commitment," Post-Print hal-00872238, HAL.

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