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Relative concave utility for risk and ambiguity

  • Baillon, Aurélien
  • Driesen, Bram
  • Wakker, Peter P.

This paper presents a general technique for comparing the concavity of different utility functions when probabilities need not be known. It generalizes: (a) Yaariʼs comparisons of risk aversion by not requiring identical beliefs; (b) Kreps and Porteusʼ information-timing preference by not requiring known probabilities; (c) Klibanoff, Marinacci, and Mukerjiʼs smooth ambiguity aversion by not using subjective probabilities (which are not directly observable) and by not committing to (violations of) dynamic decision principles; (d) comparative smooth ambiguity aversion by not requiring identical second-order subjective probabilities. Our technique completely isolates the empirical meaning of utility. It thus sheds new light on the descriptive appropriateness of utility to model risk and ambiguity attitudes.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 75 (2012)
Issue (Month): 2 ()
Pages: 481-489

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Handle: RePEc:eee:gamebe:v:75:y:2012:i:2:p:481-489
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Alain Chateauneuf & Jean-Marc Tallon, 2000. "Diversification, Convex Preferences and Non-Empty Core," Econometric Society World Congress 2000 Contributed Papers 0751, Econometric Society.
  2. Kreps, David M. & Porteus, Evan L., 1979. "Temporal von neumann-morgenstern and induced preferences," Journal of Economic Theory, Elsevier, vol. 20(1), pages 81-109, February.
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  7. Peter Klibanoff & Emre Ozdenoren, 2007. "Subjective recursive expected utility," Economic Theory, Springer, vol. 30(1), pages 49-87, January.
  8. Gaudecker, Hans-Martin von & van Soest, Arthur & Wengström, Erik, 2009. "Heterogeneity in Risky Choice Behaviour in a Broad Population," IZA Discussion Papers 4022, Institute for the Study of Labor (IZA).
  9. Jean-Marc Tallon & Alain Chateauneuf, 2002. "Diversification, convex preferences and non-empty core in the Choquet expected utility model," Economic Theory, Springer, vol. 19(3), pages 509-523.
  10. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2006. "Recursive Smooth Ambiguity Preferences," Carlo Alberto Notebooks 17, Collegio Carlo Alberto, revised 2008.
  11. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo & Siniscalchi, Marciano, 2001. "A Subjective Spin on Roulette Wheels," Working Papers 1127, California Institute of Technology, Division of the Humanities and Social Sciences.
  12. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
  13. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-68, December.
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  20. Halevy, Yoram & Ozdenoren, Emre, 2008. "Uncertainty and Compound Lotteries: Calibration," Microeconomics.ca working papers yoram_halevy-2008-7, Vancouver School of Economics, revised 17 Jun 2008.
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  23. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  24. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-63, June.
  25. David M Kreps & Evan L Porteus, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Levine's Working Paper Archive 625018000000000009, David K. Levine.
  26. Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
  27. William Neilson, 2010. "A simplified axiomatic approach to ambiguity aversion," Journal of Risk and Uncertainty, Springer, vol. 41(2), pages 113-124, October.
  28. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
  29. Dobbs, Ian M, 1991. "A Bayesian Approach to Decision-Making under Ambiguity," Economica, London School of Economics and Political Science, vol. 58(232), pages 417-40, November.
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