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A Bayesian Approach to Uncertainty Aversion

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  • Yoram Halevy
  • Vincent Feltkamp

Abstract

The Ellsberg paradox demonstrates that people's beliefs over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of several positively correlated problems, she will be uncertainty averse. We generalize this argument and derive sufficient conditions for uncertainty aversion. Copyright 2005, Wiley-Blackwell.

Suggested Citation

  • Yoram Halevy & Vincent Feltkamp, 2005. "A Bayesian Approach to Uncertainty Aversion," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 449-466.
  • Handle: RePEc:oup:restud:v:72:y:2005:i:2:p:449-466
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2005.00339.x
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    References listed on IDEAS

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    1. How Do You Feel About the Recession?
      by Martin Ryan in Geary Behaviour Centre on 2009-05-23 21:57:00

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    Cited by:

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    2. Evan Calford, 2017. "Uncertainty Aversion in Game Theory: Experimental Evidence," Purdue University Economics Working Papers 1291, Purdue University, Department of Economics.
    3. Gregory DeAngelo & Gary Charness, 2012. "Deterrence, expected cost, uncertainty and voting: Experimental evidence," Journal of Risk and Uncertainty, Springer, vol. 44(1), pages 73-100, February.
    4. Jim Engle-Warnick & Sonia Laszlo, 2017. "Learning-by-doing in an ambiguous environment," Journal of Risk and Uncertainty, Springer, vol. 55(1), pages 71-94, August.
    5. Rasmusen, Eric, 2010. "Career concerns and ambiguity aversion," Economics Letters, Elsevier, vol. 108(2), pages 175-177, August.
    6. Uri Gneezy & Alex Imas & John List, 2015. "Estimating Individual Ambiguity Aversion: A Simple Approach," Artefactual Field Experiments 00588, The Field Experiments Website.
    7. Takashi Kamihigashi & John Stachurski, 2014. "Partial Stochastic Dominance," Discussion Paper Series DP2014-23, Research Institute for Economics & Business Administration, Kobe University.
    8. Nabil Al-Najjar & Jonathan Weinstein, 2015. "A Bayesian model of Knightian uncertainty," Theory and Decision, Springer, vol. 78(1), pages 1-22, January.
    9. Igor Kopylov, 2016. "Subjective probability, confidence, and Bayesian updating," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 635-658, October.
    10. Dean, Mark & Ortoleva, Pietro, 2017. "Allais, Ellsberg, and preferences for hedging," Theoretical Economics, Econometric Society, vol. 12(1), January.
    11. Nabil I. Al-Najjar, 2015. "A Bayesian Framework for the Precautionary Principle," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 337-365.
    12. Nabil I. Al-Najjar & Luciano Pomatto, 2016. "Choice under aggregate uncertainty," Theory and Decision, Springer, vol. 80(2), pages 187-209, February.
    13. Alfred Müller & Marco Scarsini, 2002. "Even Risk-Averters may Love Risk," Theory and Decision, Springer, vol. 52(1), pages 81-99, February.
    14. Zvi Safra & Uzi Segal, 2005. "Are Universal Preferences Possible? Calibration Results for Non-Expected Utility Theories," Boston College Working Papers in Economics 633, Boston College Department of Economics.
    15. David Weisbach, 2015. "Introduction: Legal Decision Making under Deep Uncertainty," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 319-335.
    16. Rick Harbaugh, 2005. "Prospect Theory or Skill Signaling?," Working Papers 2005-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    17. Pierre Fleckinger, 2007. "On Multiagent Moral Hazard under Technological Uncertainty," Working Papers hal-00240716, HAL.
    18. Kuzmics, Christoph, 2014. "Inferring preferences from choices under uncertainty," Center for Mathematical Economics Working Papers 462, Center for Mathematical Economics, Bielefeld University.
    19. Prokosheva, Sasha, 2016. "Comparing decisions under compound risk and ambiguity: The importance of cognitive skills," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 94-105.
    20. Sasha Prokosheva, 2014. "Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills," CERGE-EI Working Papers wp525, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    21. Yang, Chun-Lei & Yao, Lan, 2011. "Ellsberg Paradox and Second-order Preference Theories on Ambiguity: Some New Experimental Evidence," MPRA Paper 28531, University Library of Munich, Germany.
    22. Gee, Laura Katherine, 2016. "The More You Know: Information Effects on Job Application Rates in a Large Field Experiment," IZA Discussion Papers 10372, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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