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Source Theory: A Tractable and Positive Ambiguity Theory

Author

Listed:
  • Aurélien Baillon

    (emlyon business school, CNRS, Université Lumière Lyon 2, Université Jean Monnet Saint-Etienne, GATE, 69007 Lyon, France)

  • Han Bleichrodt

    (Department of Economics (FAE), University of Alicante, 03690 Alicante, Spain)

  • Chen Li

    (Erasmus School of Economics, Erasmus University, 3000 DR Rotterdam, Netherlands)

  • Peter P. Wakker

    (Erasmus School of Economics, Erasmus University, 3000 DR Rotterdam, Netherlands)

Abstract

This paper introduces source theory, a new theory for decision under ambiguity (unknown probabilities). It shows how Savage’s subjective probabilities, with source-dependent nonlinear weighting functions, can model Ellsberg’s ambiguity. It can do so in Savage’s framework of state-contingent assets, permits nonexpected utility for risk, and avoids multistage complications. It is tractable, shows ambiguity attitudes through simple graphs, is empirically realistic, and can be used prescriptively. We provide a new tool to analyze weighting functions: pmatchers. They give Arrow–Pratt-like transformations but operate “within” rather than “outside” functions. We further show that ambiguity perception and inverse S probability weighting, seemingly unrelated concepts, are two sides of the same “insensitivity” coin.

Suggested Citation

  • Aurélien Baillon & Han Bleichrodt & Chen Li & Peter P. Wakker, 2025. "Source Theory: A Tractable and Positive Ambiguity Theory," Management Science, INFORMS, vol. 71(10), pages 8767-8782, October.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:10:p:8767-8782
    DOI: 10.1287/mnsc.2023.03307
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