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The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach

  • Uzi Segal

    (University of Toronto)

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.)

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Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 362.

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Date of creation: 01 Mar 1985
Date of revision:
Handle: RePEc:cla:uclawp:362
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  1. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  2. repec:tpr:qjecon:v:83:y:1969:i:2:p:324-29 is not listed on IDEAS
  3. repec:tpr:qjecon:v:88:y:1974:i:1:p:166-69 is not listed on IDEAS
  4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  5. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  6. Hogarth, Robin M & Kunreuther, Howard, 1989. " Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
  7. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  8. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
  9. 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.
  10. Robert A. Jones & Joseph M. Ostroy, 1979. "Flexibilty and Uncertainty," UCLA Economics Working Papers 163, UCLA Department of Economics.
  11. Uzi Segal, 1984. "Nonlinear Decision Weights with the Independence Axiom," UCLA Economics Working Papers 353, UCLA Department of Economics.
  12. 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 529-63, June.
  13. Mossin, Jan, 1969. "A Note on Uncertainty and Preferences in a Temporal Context," American Economic Review, American Economic Association, vol. 59(1), pages 172-74, March.
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