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A Bayesian Approach to Decision-Making under Ambiguity

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  • Dobbs, Ian M

Abstract

A Bayesian characterization of ambiguity is proposed in which outcomes constitute information that modifies the retrospective evaluation of a course of action. Hindsight bias occurs when the ex ante valuation of a course of action is affected by contemplation of hindsight evaluation. The model provides an explanation of various valuations of the expected utility model, notably the Ellsberg paradox (and related effects), the common ratio, and common consequence effects. In contrast to recent theories concerning decision-making under ambiguity, probabilities are not required to be biased or to be sub- or superadditive. Some experimental tests of ambiguity coherence are also reported. Copyright 1991 by The London School of Economics and Political Science.

Suggested Citation

  • Dobbs, Ian M, 1991. "A Bayesian Approach to Decision-Making under Ambiguity," Economica, London School of Economics and Political Science, vol. 58(232), pages 417-440, November.
  • Handle: RePEc:bla:econom:v:58:y:1991:i:232:p:417-40
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    References listed on IDEAS

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    1. Kevin E. Davis, 2002. "Self-Interest and Altruism in the Deterrence of Transnational Bribery," American Law and Economics Review, Oxford University Press, vol. 4(2), pages 314-340.
    2. Celentani, Marco & Ganuza, Juan-Jose, 2002. "Corruption and competition in procurement," European Economic Review, Elsevier, vol. 46(7), pages 1273-1303, July.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
    4. Laffont, Jean-Jacques & N'Guessan, Tchetche, 1999. "Competition and corruption in an agency relationship," Journal of Development Economics, Elsevier, vol. 60(2), pages 271-295, December.
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    Cited by:

    1. Daniel R. Burghart & Thomas Epper & Ernst Fehr, 2015. "The ambiguity triangle: uncovering fundamental patterns of behavior under uncertainty," ECON - Working Papers 196, Department of Economics - University of Zurich.
    2. Théodora Dupont-Courtade, 2012. "Insurance demand under ambiguity and conflict for extreme risks: Evidence from a large representative survey," Documents de travail du Centre d'Economie de la Sorbonne 12020, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Yehuda Izhakian, 2012. "Ambiguity Measurement," Working Papers 12-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Lars Lefgren & Brennan Platt & Joseph Price, 2011. "Sticking with What (Barely) Worked," NBER Working Papers 17477, National Bureau of Economic Research, Inc.
    5. Théodora Dupont-Courtade, 2012. "Insurance demand under ambiguity and conflict for extreme risks : Evidence from a large representative survey," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00718642, HAL.
    6. Biswas, Dipayan & Pechmann, Cornelia, 2012. "What do these clinical trial results mean? How product efficacy judgments are affected by data partitioning, framing, and quantification," Organizational Behavior and Human Decision Processes, Elsevier, vol. 117(2), pages 341-350.
    7. Irma Machielse & Danielle Timmermans & Peter Wakker, 2007. "The effects of statistical information on risk ambiguity attitudes, and on rational insurance decisions," Natural Field Experiments 00338, The Field Experiments Website.
    8. Fraser, Clive D., 1995. "Misperceived job hazards and welfare," Journal of Public Economics, Elsevier, vol. 56(1), pages 97-123, January.
    9. repec:hal:journl:halshs-00718642 is not listed on IDEAS
    10. Oleg Eismont & Heinz Welsch, 1996. "Optimal greenhouse gas emissions under various assessments of climate change ambiguity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 8(2), pages 129-140, September.
    11. Baillon, Aurélien & Driesen, Bram & Wakker, Peter P., 2012. "Relative concave utility for risk and ambiguity," Games and Economic Behavior, Elsevier, vol. 75(2), pages 481-489.
    12. Peter P. Wakker & Daniëlle R. M. Timmermans & Irma Machielse, 2007. "The Effects of Statistical Information on Risk and Ambiguity Attitudes, and on Rational Insurance Decisions," Management Science, INFORMS, vol. 53(11), pages 1770-1784, November.
    13. Welsch, Heinz, 1995. "Greenhouse gas abatement under ambiguity," Energy Economics, Elsevier, vol. 17(2), pages 91-100, April.

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