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Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion

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Abstract

We axiomatize, in an Anscombe-Aumann framework, the class of preferences that admit a representation of the form V(f) = mu - rho(d), where mu is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and rho(d) is a measure of (aversion to) dispersion that corresponds to an uncertainty premium. The key feature of these mean-dispersion preferences is that they exhibit constant absolute uncertainty aversion. This class includes many well-known models of preferences from the literature on ambiguity. We show what properties of the dispersion function rho(dot) correspond to known models, to probabilistic sophistication, and to some new notions of uncertainty aversion.

Suggested Citation

  • Simon Grant & Ben Polak, 2011. "Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion," Cowles Foundation Discussion Papers 1805, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1805
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    Cited by:

    1. Mark Schneider & Jonathan Leland & Nathaniel T. Wilcox, 2016. "Ambiguity Framed," Working Papers 16-11, Chapman University, Economic Science Institute.
    2. Loic Berger & Valentina Bosetti, 2016. "Ellsberg re-revisited: An experiment disentangling model uncertainty and risk aversion," Working Papers 576, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Massimo Marinacci, 2015. "Model Uncertainty," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1022-1100, December.
    4. repec:eee:matsoc:v:87:y:2017:i:c:p:31-39 is not listed on IDEAS
    5. Bommier, Antoine, 2017. "A dual approach to ambiguity aversion," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 104-118.
    6. repec:kap:jrisku:v:54:y:2017:i:3:d:10.1007_s11166-017-9260-4 is not listed on IDEAS
    7. Mihm, Maximilian, 2016. "Reference dependent ambiguity," Journal of Economic Theory, Elsevier, vol. 163(C), pages 495-524.
    8. Karni, Edi & Maccheroni, Fabio & Marinacci, Massimo, 2015. "Ambiguity and Nonexpected Utility," Handbook of Game Theory with Economic Applications, Elsevier.
    9. Chambers, Robert G. & Grant, Simon & Polak, Ben & Quiggin, John, 2014. "A two-parameter model of dispersion aversion," Journal of Economic Theory, Elsevier, vol. 150(C), pages 611-641.
    10. Schneider, Mark A. & Nunez, Manuel A., 2015. "A simple mean–dispersion model of ambiguity attitudes," Journal of Mathematical Economics, Elsevier, vol. 58(C), pages 25-31.
    11. Gumen, Anna & Savochkin, Andrei, 2013. "Dynamically stable preferences," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1487-1508.
    12. Mark Schneider & Manuel Nunez, 2016. "Mean-Dispersion Preferences with a Specific Dispersion Function," Working Papers 16-10, Chapman University, Economic Science Institute.
    13. Alon, Shiri & Schmeidler, David, 2014. "Purely subjective Maxmin Expected Utility," Journal of Economic Theory, Elsevier, vol. 152(C), pages 382-412.
    14. Simone Cerreia Vioglio & Fabio Maccheroni & Massimo Marinacci, 2016. "Absolute and Relative Ambiguity Aversion: A Preferential Approach," Working Papers 578, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    15. Nathaniel T. Wilcox, 2017. "Random expected utility and certainty equivalents: mimicry of probability weighting functions," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 3(2), pages 161-173, December.

    More about this item

    Keywords

    Ambiguity aversion; Translation invariance; Dispersion; Uncertainty; Probabilistic sophistication;

    JEL classification:

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

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