A Bayesian Approach to Uncentainty Aversion
The Ellsberg Paradox demonstrates that people's belief over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of several positively correlated problems - she will be uncertainty averse. We generalize this argument and derive sufficient conditions for uncertainty aversion.
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References listed on IDEAS
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- Rakesh Sarin & Peter Wakker, 1997.
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