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Maximum probabilities, information, and choice under uncertainty

Author

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  • Burghart, Daniel R.

Abstract

This note proposes a simple, expected utility-like model for decision making under uncertainty. The model uses the maximum probability for each possible outcome and the amount of information conveyed by this upper envelope. A graphical tool is introduced and used to study the model when two outcomes are possible. The model is extended to an abstract number of outcomes in which interpersonal comparisons of preferences are considered along with applications to medical decision making and financial asset demand.

Suggested Citation

  • Burghart, Daniel R., 2018. "Maximum probabilities, information, and choice under uncertainty," Economics Letters, Elsevier, vol. 167(C), pages 43-47.
  • Handle: RePEc:eee:ecolet:v:167:y:2018:i:c:p:43-47
    DOI: 10.1016/j.econlet.2018.03.010
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    References listed on IDEAS

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    1. Burghart, Daniel R. & Epper, Thomas & Fehr, Ernst, 2015. "The Ambiguity Triangle: Uncovering Fundamental Patterns of Behavior Under Uncertainty," IZA Discussion Papers 9150, Institute of Labor Economics (IZA).
    2. David S. Ahn, 2008. "Ambiguity Without a State Space," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 3-28.
    3. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    4. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," Review of Economic Studies, Oxford University Press, vol. 31(2), pages 91-96.
    5. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    6. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
    7. Wojciech Olszewski, 2007. "Preferences Over Sets of Lotteries -super-1," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 567-595.
    8. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
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    Citations

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    Cited by:

    1. Daniel R. Burghart & Thomas Epper & Ernst Fehr, 2020. "The uncertainty triangle – Uncovering heterogeneity in attitudes towards uncertainty," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 125-156, April.

    More about this item

    Keywords

    Decision-making; Uncertainty; Expected utility; Portfolio choice;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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