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Scale-invariant uncertainty-averse preferences and source-dependent constant relative risk aversion

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  • Skiadas, Costis

    () (Kellogg School of Management, Northwestern University)

Abstract

Preferences are defined over payoffs that are contingent on a finite number of states representing a horse race (Knightian uncertainty) and a roulette (objective risk). The class of scale-invariant (SI) ambiguity-averse preferences, in a broad sense, is uniquely characterized by a multiple-prior utility representation. Adding a weak certainty independence axiom is shown to imply either unit CRRA toward roulette risk or SI maxmin expected utility. Removing the weak independence axiom but adding a separability assumption on preferences over pure horse-race bets leads to source-dependent constant-relative-risk-aversion expected utility with a higher CRRA assigned to horse-race uncertainty than to roulette risk. The multiple-prior representation in this case is shown to generalize entropic variational preferences. An appendix characterizes the functional forms associated with SI ambiguity-averse preferences in terms of suitable weak independence axioms in place of scale invariance.

Suggested Citation

  • Skiadas, Costis, 2013. "Scale-invariant uncertainty-averse preferences and source-dependent constant relative risk aversion," Theoretical Economics, Econometric Society, vol. 8(1), January.
  • Handle: RePEc:the:publsh:1004
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    File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20130059/8130/247
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    References listed on IDEAS

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    1. Tomasz Strzalecki, 2011. "Axiomatic Foundations of Multiplier Preferences," Econometrica, Econometric Society, vol. 79(1), pages 47-73, January.
    2. Cerreia-Vioglio, S. & Maccheroni, F. & Marinacci, M. & Montrucchio, L., 2011. "Uncertainty averse preferences," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1275-1330, July.
    3. Werner, Jan, 2005. "A simple axiomatization of risk-averse expected utility," Economics Letters, Elsevier, vol. 88(1), pages 73-77, July.
    4. Chateauneuf, Alain & Faro, José Heleno, 2009. "Ambiguity through confidence functions," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 535-558, September.
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    Cited by:

    1. Breitmoser, Yves & Vorjohann, Pauline, 2018. "Welfare-Based Altruism," Rationality and Competition Discussion Paper Series 89, CRC TRR 190 Rationality and Competition.
    2. Bommier, Antoine, 2017. "A dual approach to ambiguity aversion," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 104-118.

    More about this item

    Keywords

    Uncertainty aversion; ambiguity aversion; source-dependent risk aversion; scale invariance; homotheticity;

    JEL classification:

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

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