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Ambiguity Models and the Machina Paradoxes

Author

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  • Aurelien Baillon
  • Olivier L'Haridon
  • Laetitia Placido

Abstract

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)

Suggested Citation

  • Aurelien Baillon & Olivier L'Haridon & Laetitia Placido, 2011. "Ambiguity Models and the Machina Paradoxes," American Economic Review, American Economic Association, vol. 101(4), pages 1547-1560, June.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:4:p:1547-60
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    References listed on IDEAS

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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