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Randomization and Ambiguity Aversion

Author

Listed:
  • Shaowei Ke
  • Qi Zhang

Abstract

We propose a model of preferences in which the effect of randomization on ambiguity depends on how the unknown probability law is determined. We adopt the framework of Anscombe and Aumann (1963) and relax the axioms. In the resulting representation of the individual's preference, the individual has a collection of sets of priors M. She believes that before she moves, nature has chosen an unknown scenario (a set of priors) from M, and from that scenario, nature will choose a prior after she moves. The representation illustrates how randomization may partially eliminate the effect of ambiguity.

Suggested Citation

  • Shaowei Ke & Qi Zhang, 2020. "Randomization and Ambiguity Aversion," Econometrica, Econometric Society, vol. 88(3), pages 1159-1195, May.
    • Handle: RePEc:wly:emetrp:v:88:y:2020:i:3:p:1159-1195
    DOI: 10.3982/ECTA15182
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    References listed on IDEAS

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