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A Bayesian Approach to Uncertainty Aversion

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  • Feltkamp, Vincent
  • Halevy, Yoram

Abstract

The Ellsberg Paradox demonstrates that people's belief over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of several positively correlated problems - she will be uncertainty averse. We generalize this argument and derive sufficient conditions for uncertainty aversion.

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File URL: http://www.econ.ubc.ca/halevy/HalevyFeltkampRES2005.pdf
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Bibliographic Info

Paper provided by Microeconomics.ca Website in its series Micro Theory Working Papers with number halevy-04-02-13-07-48-37.

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Length: 0 pages
Date of creation: 13 Feb 2004
Date of revision: 08 Jun 2008
Handle: RePEc:ubc:pmicro:halevy-04-02-13-07-48-37

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Related research

Keywords: Ellsberg Paradox; rule rationality; ambiguity aversion; risk aversionm subjective probability; reduction of compound lotteries;

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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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Citations

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Cited by:
  1. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, 03.
  2. Mark Dean & Pietro Ortoleva, 2012. "Allais, Ellsberg, and Preferences for Hedging," Working Papers 2012-2, Brown University, Department of Economics.
  3. Alfred Müller & Marco Scarsini, 2002. "Even Risk-Averters may Love Risk," Theory and Decision, Springer, vol. 52(1), pages 81-99, February.
  4. Rick Harbaugh, 2005. "Prospect Theory or Skill Signaling?," Working Papers 2005-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  5. Christoph Kuzmics, 2012. "Inferring preferences from choices under uncertainty," Working Papers 462, Bielefeld University, Center for Mathematical Economics.

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