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Sources of Uncertainty and Subjective Prices

Author

Listed:
  • Veronica Cappelli
  • Simone Cerreia-Vioglio
  • Fabio Maccheroni
  • Massimo Marinacci
  • Stefania Minardi

Abstract

We develop a general framework to study source-dependent preferences in economic contexts. We behaviorally identify two key features. First, we drop the assumption of uniform uncertainty attitudes and allow for source-dependent attitudes. Second, we introduce subjective prices to compare outcomes across different sources. Our model evaluates profiles source-wise, by computing the source-dependent certainty equivalents; the latter are converted into the unit of account of a common source and then aggregated into a unique evaluation. By viewing time and location as instances of sources, we show that subjective discount factors and subjective exchange rates are emblematic examples of subjective prices. Finally, we use the model to explore the implications on optimal portfolio allocations and home bias.

Suggested Citation

  • Veronica Cappelli & Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Stefania Minardi, 2021. "Sources of Uncertainty and Subjective Prices," Journal of the European Economic Association, European Economic Association, vol. 19(2), pages 872-912.
    • Handle: RePEc:oup:jeurec:v:19:y:2021:i:2:p:872-912.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvaa013
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    Cited by:

    1. Madhav Chandrasekher & Mira Frick & Ryota Iijima & Yves Le Yaouanq, 2022. "Dual‐Self Representations of Ambiguity Preferences," Econometrica, Econometric Society, vol. 90(3), pages 1029-1061, May.
    2. Frick, Mira & Iijima, Ryota & Le Yaouanq, Yves, 2019. "Boolean Representations of Preferences under Ambiguity," Rationality and Competition Discussion Paper Series 173, CRC TRR 190 Rationality and Competition.
    3. Mohammed Abdellaoui & Horst Zank, 2023. "Source and rank-dependent utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(4), pages 949-981, May.
    4. Monica Billio & Massimo Guidolin & Francesco Rocciolo, 2024. "Responsible Investing under Climate Change Uncertainty," Working Papers 2024: 15, Department of Economics, University of Venice "Ca' Foscari".

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