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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 28 (1987)
Issue (Month): 1 (February)
|Contact details of provider:|| Postal: 160 McNeil Building, 3718 Locust Walk, Philadelphia, PA 19104-6297|
Phone: (215) 898-8487
Fax: (215) 573-2057
Web page: http://www.econ.upenn.edu/ier
More information through EDIRC
|Order Information:|| Web: http://www.blackwellpublishing.com/subs.asp?ref=0020-6598 Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert A. Jones & Joseph M. Ostroy, 1979.
"Flexibilty and Uncertainty,"
UCLA Economics Working Papers
163, UCLA Department of Economics.
- Roger Sherman, 1974. "The Psychological Difference Between Ambiguity and Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 166-169.
- David Schmeidler, 1989.
"Subjective Probability and Expected Utility without Additivity,"
Levine's Working Paper Archive
7662, David K. Levine.
- Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- K. R. W. Brewer, 1963. "Decisions Under Uncertainty: Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 77(1), pages 159-161.
- Kreps, David M & Porteus, Evan L, 1978.
"Temporal Resolution of Uncertainty and Dynamic Choice Theory,"
Econometric Society, vol. 46(1), pages 185-200, January.
- David M Kreps & Evan L Porteus, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Levine's Working Paper Archive 625018000000000009, David K. Levine.
- Hogarth, Robin M & Kunreuther, Howard, 1989. "Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
- 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.
- Vernon L. Smith, 1969. "Measuring Nonmonetary Utilities in Uncertain Choices: The Ellsberg Urn," The Quarterly Journal of Economics, Oxford University Press, vol. 83(2), pages 324-329.
- 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.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Machina, Mark J, 1982.
""Expected Utility" Analysis without the Independence Axiom,"
Econometric Society, vol. 50(2), pages 277-323, March.
- Mark J Machina, 1982. ""Expected Utility" Analysis without the Independence Axiom," Levine's Working Paper Archive 7650, David K. Levine.
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Uzi Segal, 1984. "Nonlinear Decision Weights with the Independence Axiom," UCLA Economics Working Papers 353, UCLA Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:ier:iecrev:v:28:y:1987:i:1:p:175-202. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.