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Expected utility with uncertain probabilities theory

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  • Izhakian, Yehuda

Abstract

This paper introduces a model of decision making under ambiguity by extending the Bayesian approach to uncertain probabilities. In this model, preferences for ambiguity pertain directly to probabilities such that attitude toward ambiguity is defined as attitude toward mean-preserving spreads in probabilities—analogous to the Rothschild–Stiglitz risk attitude toward mean-preserving spreads in outcomes. The model refines the separations between tastes and beliefs, and between risk and ambiguity. These separations are crucial for the measurement of the degree of ambiguity and for the elicitation and characterization of attitudes toward ambiguity, thereby providing an empirically and experimentally applicable framework.

Suggested Citation

  • Izhakian, Yehuda, 2017. "Expected utility with uncertain probabilities theory," Journal of Mathematical Economics, Elsevier, vol. 69(C), pages 91-103.
  • Handle: RePEc:eee:mateco:v:69:y:2017:i:c:p:91-103
    DOI: 10.1016/j.jmateco.2016.12.004
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    11. Izhakian, Yehuda & Yermack, David, 2017. "Risk, ambiguity, and the exercise of employee stock options," Journal of Financial Economics, Elsevier, vol. 124(1), pages 65-85.
    12. He, Ying & Dyer, James S. & Butler, John C. & Jia, Jianmin, 2019. "An additive model of decision making under risk and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 78-92.
    13. Bommier, Antoine, 2017. "A dual approach to ambiguity aversion," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 104-118.
    14. Brenner, Menachem & Izhakian, Yehuda, 2018. "Asset pricing and ambiguity: Empirical evidence⁎," Journal of Financial Economics, Elsevier, vol. 130(3), pages 503-531.
    15. Ben-Rephael, Azi & Cookson, J. Anthony & izhakian, yehuda, 2022. "Do I Really Want to Hear The News? Public Information Arrival and Investor Beliefs," SocArXiv ud7yw, Center for Open Science.
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