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Ambiguity and Probabilistic Information

Author

Listed:
  • Adam Dominiak

    (Department of Economics, Virginia Tech, Blacksburg, Virginia 24061)

  • Jean-Philippe Lefort

    (Laboratoire d'Economie de Dauphine, Department of Economics, Université Paris-Dauphine – PSL, 75 775 Paris Cedex 16, France)

Abstract

Experiments detecting ambiguity aversion often rely on the assumption that probabilities are exogenously given for some uncertain events. However, the canonical models that accommodate ambiguity into economic theory, such as the maxmin expected utility (MEU) and Choquet expected utility (CEU) models, are purely subjective. These models do not specify how subjects could incorporate exogenous probabilities into decisions. We study two approaches for embedding exogenous probabilities in the context of the thought experiments suggested by Mark Machina. We show that Machina’s choice behavior entails fundamentally different consequences for the ambiguity models mentioned; although it violates the CEU model, it is consistent with the MEU model. For the latter model, Machina’s experiments can test whether individuals adhere to expected utility for prospects whose consequences occur with the exogenously given probabilities.

Suggested Citation

  • Adam Dominiak & Jean-Philippe Lefort, 2021. "Ambiguity and Probabilistic Information," Management Science, INFORMS, vol. 67(7), pages 4310-4326, July.
  • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:7:p:4310-4326
    DOI: 10.1287/mnsc.2020.3705
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    References listed on IDEAS

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