The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach
The paper describes a decision process under which it is rational to prefer a lottery with known probabilities to a similar ambiguous lottery where the decision maker does not know the exact values of the probabilities (the "Ellsberg paradox"). This is done by modeling ambiguous lotteries as two-stage lotteries, by assuming the independence axiom without the reduction of compound lotteries axiom, and by using the anticipated utility functional. This paper also gives conditions under which less ambiguity is preferred and presents some comparative statics analysis as well as some inter-personal comparisons. Finally, it proves that within the anticipated utility framework, risk and ambiguity are almost identical. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Volume (Year): 28 (1987)
Issue (Month): 1 (February)
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References listed on IDEAS
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- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
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- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Mossin, Jan, 1969. "A Note on Uncertainty and Preferences in a Temporal Context," American Economic Review, American Economic Association, vol. 59(1), pages 172-74, March.
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