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Ambiguity in the small and in the large

Author

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  • Paolo Ghirardato
  • Marciano Siniscalchi

Abstract

This paper considers local and global multiple-prior representations of ambiguity for preferences that are (i) monotonic, (ii) Bernoullian, i.e. admit an affine utility representation when restricted to constant acts, and (iii) locally Lipschitz continuous. We do not require either Certainty Independence or Uncertainty Aversion. We show that the set of priors identified by Ghirardato, Maccheroni, and Marinacci (2004)’s ‘unambiguous preference’ relation can be characterized as a union of Clarke differentials. We then introduce a behavioral notion of ‘locally better deviation’ at an act, and show that it characterizes the Clarke differential of the preference representation at that act. These results suggest that the priors identified by these preference statements are directly related to (local) optimizing behavior.

Suggested Citation

  • Paolo Ghirardato & Marciano Siniscalchi, 2012. "Ambiguity in the small and in the large," Carlo Alberto Notebooks 255, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:255
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    Keywords

    Ambiguity; Optimization; Robustness; Derivative.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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