Allais, Ellsberg, and Preferences for Hedging
We study the relation between ambiguity aversion and the Allais paradox. To this end, we introduce a novel de nition of hedging which applies to objective lotteries as well as to uncertain acts, and we use it to de ne a novel axiom that captures a preference for hedging which generalizes the one of Schmeidler (1989). We argue how this generalized axiom captures both aversion to ambiguity, and attraction towards certainty for objective lotteries. We show that this axiom, together with other standard ones, is equivalent to to two representations both of which generalize the MaxMin Expected Utility model of Gilboa and Schmeidler (1989). In both, the agent reacts to ambiguity using multiple priors, but does not use expected utility to evaluate objective lotteries. In our rst representation, the agent treats objective lotteries as `ambiguous objects,' and use a set of priors to evaluate them. In the second, equivalent representation, lotteries are evaluated by distorting probabilities as in the Rank-Dependent Utility model, but using the worst from a set of such distortions. Finally, we show how a preference for hedging is not sucient to guarantee an Ellsberg-like behavior if the agent violate expected utility for objective lotteries. We then provide an axiom that guarantees that this is the case, and nd an associated representation in which the agent rst maps acts to an objective lottery using the worst of the priors in a set; then evaluates this lottery using the worst distortion from a set of concave Rank-Dependent Utility functionals.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, Brown University, Providence, RI 02912|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Massimo Marinacci & Fabio Maccheroni & Alain Chateauneuf & Jean-Marc Tallon, 2003.
"Monotone Continuous Multiple Priors,"
ICER Working Papers - Applied Mathematics Series
30-2003, ICER - International Centre for Economic Research.
- Alain Chateauneuf & Fabio Macheronni & Massimo Marinacci & Jean-Marc Tallon, 2005. "Monotone continuous multiple priors," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00177057, HAL.
- Yoram Halevy & Vincent Feltkamp, .
"A Bayesian Approach to Uncentainty Aversion,"
Penn CARESS Working Papers
f17f3e2c6ad93e4b53fd58fc9, Penn Economics Department.
- Yoram Halevy & Vincent Feltkamp, . "A Bayesian Approach to Uncentainty Aversion," CARESS Working Papres 99-03, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Feltkamp, Vincent & Halevy, Yoram, 2004. "A Bayesian Approach to Uncertainty Aversion," Microeconomics.ca working papers halevy-04-02-13-07-48-37, Vancouver School of Economics, revised 25 Feb 2014.
- Vincent Feltkamp & Yoram Halevy, 1999. "- A Bayesian Approach To Uncertainty Aversion," Working Papers. Serie AD 1999-14, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Vincent Feltkamp & Yoram Halevy, 2000. "A Bayesian Approach to Uncertainty Aversion," Econometric Society World Congress 2000 Contributed Papers 1125, Econometric Society.
- Sujoy Mukerji & Peter Klibanoff, 2002.
"A Smooth Model of Decision,Making Under Ambiguity,"
Economics Series Working Papers
113, University of Oxford, Department of Economics.
- Nakamura Y., 1996.
"Rank dependent utility for arbitrary consequnce spaces,"
Mathematical Social Sciences,
Elsevier, vol. 31(1), pages 54-54, February.
- Nakamura, Yutaka, 1995. "Rank dependent utility for arbitrary consequence spaces," Mathematical Social Sciences, Elsevier, vol. 29(2), pages 103-129, April.
- Halevy, Yoram, 2005.
"Ellsberg Revisited: an Experimental Study,"
Microeconomics.ca working papers
halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Efe A. Ok & Pietro Ortoleva & Gil Riella, 2012. "Incomplete Preferences Under Uncertainty: Indecisiveness in Beliefs versus Tastes," Econometrica, Econometric Society, vol. 80(4), pages 1791-1808, 07.
- Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Luigi Montrucchio, 2008.
"Uncertainty Averse Preferences,"
Carlo Alberto Notebooks
77, Collegio Carlo Alberto.
- Simone Cerreia-Vioglio & Paolo Ghirardato & Fabio Maccheroni & Massimo Marinacci & Marciano Siniscalchi, 2010.
"Rational Preferences under Ambiguity,"
Carlo Alberto Notebooks
169, Collegio Carlo Alberto.
- Dillenberger, David, 2008. "Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior," MPRA Paper 8342, University Library of Munich, Germany.
When requesting a correction, please mention this item's handle: RePEc:bro:econwp:2012-2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Brown Economics Webmaster)
If references are entirely missing, you can add them using this form.