Scale-invariant uncertainty-averse preferences and source-dependent constant relative risk aversion
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.
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- 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.
- Tomasz Strzalecki, .
"Axiomatic Foundations of Multiplier Preferences,"
8239, Harvard University OpenScholar.
- Alain Chateauneuf & José Heleno Faro, 2009.
"Ambiguity through confidence functions,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
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