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Stochastically independent randomization and uncertainty aversion

Author

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  • Peter Klibanoff

    () (Department of Managerial Economics and Decision Sciences, Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208, USA)

Abstract

This paper proposes a preference-based condition for stochastic independence of a randomizing device in a product state space. This condition is applied to investigate some classes of preferences that allow for both independent randomization and uncertainty or ambiguity aversion (a la Ellsberg). For example, when imposed on Choquet Expected Utility (CEU) preferences in a Savage framework displaying uncertainty aversion in the spirit of Schmeidler [27], it results in a collapse to Expected Utility (EU). This shows that CEU preferences that are uncertainty averse in the sense of Schmeidler should not be used in settings where independent randomization is to be allowed. In contrast, Maxmin EU with multiple priors preferences continue to allow for a very wide variety of uncertainty averse preferences when stochastic independence is imposed. Additionally, these points are used to reexamine some recent arguments against preference for randomization with uncertainty averse preferences. In particular, these arguments are shown to rely on preferences that do not treat randomization as a stochastically independent event.

Suggested Citation

  • Peter Klibanoff, 2001. "Stochastically independent randomization and uncertainty aversion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 605-620.
  • Handle: RePEc:spr:joecth:v:18:y:2001:i:3:p:605-620
    Note: Received: February 10, 2000; revised version: March 30, 2000
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    Citations

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    Cited by:

    1. Frank Riedel & Linda Sass, 2014. "Ellsberg games," Theory and Decision, Springer, vol. 76(4), pages 469-509, April.
    2. Aurelien Baillon & Olivier L'Haridon & Laetitia Placido, 2011. "Ambiguity Models and the Machina Paradoxes," American Economic Review, American Economic Association, vol. 101(4), pages 1547-1560, June.
    3. Bade, Sophie, 2015. "Randomization devices and the elicitation of ambiguity-averse preferences," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 221-235.
    4. Jürgen Eichberger & Simon Grant & David Kelsey, 2016. "Randomization and dynamic consistency," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 547-566, August.
    5. Bade, Sophie, 2011. "Ambiguous act equilibria," Games and Economic Behavior, Elsevier, vol. 71(2), pages 246-260, March.
    6. Adam Dominiak & Wendelin Schnedler, 2011. "Attitudes toward uncertainty and randomization: an experimental study," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 289-312, October.
    7. Marciano Siniscalchi, 2001. "Bayesian Updating for General Maxmin Expected Utility Preferences," Discussion Papers 1366, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Sass, Linda, 2014. "Kuhn's Theorem for Extensive Form Ellsberg Games," Center for Mathematical Economics Working Papers 478, Center for Mathematical Economics, Bielefeld University.
    9. repec:eee:gamebe:v:104:y:2017:i:c:p:666-673 is not listed on IDEAS
    10. Klaus Nehring, 2006. "Decision-Making in the Context of Imprecise Probabilistic Beliefs," Economics Working Papers 0034, Institute for Advanced Study, School of Social Science.

    More about this item

    Keywords

    Uncertainty aversion; Stochastic independence; Preference for randomization; Ambiguity aversion.;

    JEL classification:

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

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