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Subjective risk, confidence, and ambiguity

  • Traeger, Christian P.

    ()

    (University of California, Berkeley. Dept of agricultural and resource economics)

The paper incorporates qualitative differences of probabilistic beliefs into a rational (or normatively motivated) decision framework. Probabilistic beliefs can range from objective probabilities to pure guesstimates. The decision maker in the present model takes into account his confidence in beliefs when evaluating general uncertain situations. From an axiomatic point of view, the approach stays as close as possible to the widespread von Neumann-Morgenstern framework. The resulting representation uses only basic tools from risk analysis, but employs them recursively. The paper extends the concept of smooth ambiguity aversion to a more general notion of aversion to the subjectivity of belief. As a special case, the framework permits a threefold disentanglement of intertemporal substitutability, Arrow-Pratt risk aversion, and smooth ambiguity aversion. A decision maker’s preferences can nest a variety of widespread decision criteria, which are selected according to his confidence in the uncertainty assessment of a particular setting.

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Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1103R2.

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Length: 32 pages
Date of creation: Dec 2009
Date of revision: May 2011
Handle: RePEc:are:cudare:1103r2
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  1. Klibanoff, Peter & Marinacci, Massimo & Mukerji, Sujoy, 2009. "Recursive smooth ambiguity preferences," Journal of Economic Theory, Elsevier, vol. 144(3), pages 930-976, May.
  2. Grandmont, Jean-Michel, 1972. "Continuity properties of a von Neumann-Morgenstern utility," Journal of Economic Theory, Elsevier, vol. 4(1), pages 45-57, February.
  3. Maccheroni, Fabio & Marinacci, Massimo & Rustichini, Aldo, 2006. "Dynamic variational preferences," Journal of Economic Theory, Elsevier, vol. 128(1), pages 4-44, May.
  4. Uzi Segal, 1989. "Two-Stage Lotteries Without the Reduction Axiom," UCLA Economics Working Papers 552, UCLA Department of Economics.
  5. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  6. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  7. Miao, Jianjun & Hayashi, Takashi, 2011. "Intertemporal substitution and recursive smooth ambiguity preferences," Theoretical Economics, Econometric Society, vol. 6(3), September.
  8. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
  9. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
  10. Grant, Simon & Chateauneuf, A. & Eichberger, J., 2002. "Choice under Uncertainty with the Best and Worst in Mind: Neo-additive Capacities," Working Papers 2002-10, Rice University, Department of Economics.
  11. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
  12. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  13. Kyoungwon Seo, 2009. "Ambiguity and Second-Order Belief," Econometrica, Econometric Society, vol. 77(5), pages 1575-1605, 09.
  14. Ergin, Haluk & Gul, Faruk, 2009. "A theory of subjective compound lotteries," Journal of Economic Theory, Elsevier, vol. 144(3), pages 899-929, May.
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