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Ambiguity and Decision Modeling: A Preference-Based Approach

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  • Sarin, Rakesh K
  • Winkler, Robert L

Abstract

In this article, we develop a model that permits a decision maker's preferences to depend on the decision maker's ambiguity about the probability of an event that is relevant for decision-making purposes. We deal with ambiguity about the probability through preference modeling, with ambiguity leading to modifications in the utilities of outcomes. The behavior of ambiguity premiums and probability premiums as the payoffs are varied depends on the nature of the modifications in utilities. Particular forms of the model that arise under different sets of assumptions about preferences include additive, bilinear, and ratio forms. We conclude with a brief example and some thoughts about potential generalizations and implications of the model. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Sarin, Rakesh K & Winkler, Robert L, 1992. "Ambiguity and Decision Modeling: A Preference-Based Approach," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 389-407, October.
  • Handle: RePEc:kap:jrisku:v:5:y:1992:i:4:p:389-407
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    Cited by:

    1. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    2. Koch, Christopher & Schunk, Daniel, 2007. "The Case for Limited Auditor Liability - The Effects of Liability Size on Risk Aversion and Ambiguity Aversion," Sonderforschungsbereich 504 Publications 07-04, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    3. Ali Ahmed & Göran Skogh, 2006. "Choices at various levels of uncertainty: An experimental test of the restated diversification theorem," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 183-196, December.

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