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The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach

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  • Uzi Segal

    (University of Toronto)

Abstract

The paper describes a decision process under which it is rational to prefer a lottery with known probabilities to a similar ambiguous lottery where the decision maker does not know the exact values of the probabilities (the "Ellsberg paradox"). This is done by modeling ambiguous lotteries as two-stage lotteries, by assuming the independence axiom without the reduction of compound lotteries axiom, and by using the anticipated utility functional. This paper also gives conditions under which less ambiguity is preferred and presents some comparative statics analysis as well as some inter-personal comparisons. Finally, it proves that within the anticipated utility framework, risk and ambiguity are almost identical. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Uzi Segal, 1985. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," UCLA Economics Working Papers 362, UCLA Department of Economics.
  • Handle: RePEc:cla:uclawp:362
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    References listed on IDEAS

    as
    1. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
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    6. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    7. Hogarth, Robin M & Kunreuther, Howard, 1989. "Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
    8. Ronen, J, 1971. "Some Effects Of Sequential Aggregation In Accounting On Decision-Making," Journal of Accounting Research, Wiley Blackwell, vol. 9(2), pages 307-332.
    9. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    10. K. R. W. Brewer, 1963. "Decisions Under Uncertainty: Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 77(1), pages 159-161.
    11. Uzi Segal, 1984. "Nonlinear Decision Weights with the Independence Axiom," UCLA Economics Working Papers 353, UCLA Department of Economics.
    12. Roger Sherman, 1974. "The Psychological Difference Between Ambiguity and Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 166-169.
    13. 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.
    14. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-563, June.
    15. Robert A. Jones & Joseph M. Ostroy, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 13-32.
    16. Uzi Segal, 1986. "Probabilistic Insurance and Anticipated Utility," UCLA Economics Working Papers 390, UCLA Department of Economics.
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