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Ambiguity Models and the Machina Paradoxes

  • Aurelien Baillon
  • Olivier L'Haridon
  • Laetitia Placido

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results. (JEL D81)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 4 (June)
Pages: 1547-60

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:4:p:1547-60
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  1. Alain Chateauneuf & Rose Anne Dana & Jean-Marc Tallon, 2002. "Diversification, convex preferences and non-empty core in the Choquet expected utility model," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174770, HAL.
  2. Olivier L’Haridon & Lætitia Placido, 2010. "Betting on Machina’s reflection example: an experiment on ambiguity," Theory and Decision, Springer, vol. 69(3), pages 375-393, September.
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  8. Nicolas Treich, 2008. "The Value of a Statistical Life under Ambiguity Aversion," CESifo Working Paper Series 2291, CESifo Group Munich.
  9. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
  10. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
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