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Alternative Types of Ambiguity and their Effects on the Probabilistic Properties and Tail Risks of Environmental-Policy Variables

Author

Listed:
  • Phoebe Koundouri
  • Nikitas Pittis

    () (University of Piraeus, Greece)

  • Panagiotis Samartzis
  • Nikolaos Englezos

    ()

  • Andreas Papandreou

    ()

Abstract

The concept of ambiguity with respect to decision making about climate change has recently attracted a lot of research interest. The standard approach for introducing ambiguity into this framework is to assume that the decision maker (DM) exhibits ambiguity aversion, with the latter being represented by axioms on DMs preferences different than Savageâ��s (sure-thing principle). As a result, DM is deprived of the property of probabilistic sophistication, since she is faced with either multiple prior probability functions, or a single but incoherent one (capacity). This paper approaches the issue of ambiguity with respect to climate change from a different perspective. In particular, we assume that ambiguity does exists but it does not affect the formation of DMs prior probability function. Instead, it a�¤ects the formation of her posterior probability function. Specifically, we assume that there are n experts, who supply DM with probabilistic input. Hence, although DM has a well defined prior (formed before any expert information on objective probabilities has arrived), she cannot decide which piece of information should conditionalize upon (defer to). We refer to this type of ambiguity as "deferential ambiguity" and show that it affects both DM and the experts. We also introduce a second type of ambiguity, which is solely born by the experts. This type of ambiguity stems from the experts potential inability to discern DMs preferences. This ambiguity is referred to as "preferential ambiguity" in the paper. The main objective of the paper is to analyze the possible interactions between the two types of ambiguity mentioned above and to assess their impact on the probabilistic properties (in particular, tail risks) of environmental-policy variables.

Suggested Citation

  • Phoebe Koundouri & Nikitas Pittis & Panagiotis Samartzis & Nikolaos Englezos & Andreas Papandreou, 2017. "Alternative Types of Ambiguity and their Effects on the Probabilistic Properties and Tail Risks of Environmental-Policy Variables," DEOS Working Papers 1703, Athens University of Economics and Business.
  • Handle: RePEc:aue:wpaper:1703
    as

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    File URL: http://wpa.deos.aueb.gr/docs/2017.Uncertainty.pdf
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    References listed on IDEAS

    as
    1. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    2. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    3. Al-Najjar, Nabil I. & Weinstein, Jonathan, 2009. "The Ambiguity Aversion Literature: A Critical Assessment," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 249-284, November.
    4. Aurélien Baillon & Laure Cabantous & Peter Wakker, 2012. "Aggregating imprecise or conflicting beliefs: An experimental investigation using modern ambiguity theories," Journal of Risk and Uncertainty, Springer, vol. 44(2), pages 115-147, April.
    5. Al-Najjar, Nabil I. & Weinstein, Jonathan, 2009. "Rejoinder: The “Ambiguity Aversion Literature: A Critical Assessment”," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 357-369, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    decision making on climate change; ambiguity; deep uncertainty; Savage�s sure-thing principle; deferential ambiguity; preferential ambiguity; tail risks of environmental-policy variables.;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D - Microeconomics

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