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Subjective ambiguity and preference for flexibility

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  • Gorno, Leandro
  • Natenzon, Paulo

Abstract

A preference over menus is monotonic when every menu is at least as good as any of its subsets. We show that every utility representation for a monotonic preference is equal to the minmax value of a decision maker whose payoff depends on the option chosen from the menu and on the realization of a subjective state. This representation suggests a decision maker who faces uncertainty about her own future tastes and who exhibits an extreme form of pessimism with respect to this uncertainty. In the case of finitely many alternatives, we provide a characterization of monotonic preferences which relaxes the submodularity axiom of Kreps (1979). We characterize the minimal state space needed for our representation, and we show that the second-period choice behavior of our decision maker differs from the one implied by the costly contemplation model of Ergin (2003).

Suggested Citation

  • Gorno, Leandro & Natenzon, Paulo, 2018. "Subjective ambiguity and preference for flexibility," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 24-32.
  • Handle: RePEc:eee:jeborg:v:154:y:2018:i:c:p:24-32
    DOI: 10.1016/j.jebo.2018.07.009
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    References listed on IDEAS

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    1. Eddie Dekel & Barton L Lipman & Aldo Rustichini & Todd Sarver, 2007. "Representing Preferences with a Unique Subjective State Space: A Corrigendum -super-1," Econometrica, Econometric Society, vol. 75(2), pages 591-600, March.
    2. Kreps, David M, 1979. "A Representation Theorem for "Preference for Flexibility"," Econometrica, Econometric Society, vol. 47(3), pages 565-577, May.
    3. Kalyan Chatterjee & R. Krishna, 2011. "On preferences with infinitely many subjective states," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(1), pages 85-98, January.
    4. David S. Ahn & Todd Sarver, 2013. "Preference for Flexibility and Random Choice," Econometrica, Econometric Society, vol. 81(1), pages 341-361, January.
    5. Gorno, Leandro, 2016. "Additive representation for preferences over menus in finite choice settings," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 41-47.
    6. David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2017. "Optimism and Pessimism with Expected Utility," Journal of the European Economic Association, European Economic Association, vol. 15(5), pages 1158-1175.
    7. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    8. Klaus Nehring, 1999. "Preference for Flexibility in a Savage Framework," Econometrica, Econometric Society, vol. 67(1), pages 101-120, January.
    9. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
    10. Epstein, Larry G. & Marinacci, Massimo & Seo, Kyoungwon, 2007. "Coarse contingencies and ambiguity," Theoretical Economics, Econometric Society, vol. 2(4), December.
    11. Haluk Ergin & Todd Sarver, 2010. "A Unique Costly Contemplation Representation," Econometrica, Econometric Society, vol. 78(4), pages 1285-1339, July.
    12. Sadowski, Philipp, 2008. "Conditional Preference for Flexibility: Eliciting Beliefs from Behavior," MPRA Paper 8614, University Library of Munich, Germany.
    13. Schenone, Pablo, 2016. "Identifying subjective beliefs in subjective state space models," Games and Economic Behavior, Elsevier, vol. 95(C), pages 59-72.
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    Cited by:

    1. Gorno, Leandro, 2016. "Additive representation for preferences over menus in finite choice settings," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 41-47.
    2. Richter, Michael & Rubinstein, Ariel, 2019. ""Convex preferences": a new definition," Theoretical Economics, Econometric Society, vol. 14(4).

    More about this item

    Keywords

    Preference for flexibility; Pessimism; Subjective ambiguity; Self-paternalism;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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