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Confidence and ambiguity

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Listed author(s):
  • Hill, Brian

    ()

Abstract

This paper proposes a model of the decision-maker’s confidence in his probability judgements, in terms of an implausibility measure – a real-valued function on the set of probability functions. A decision rule is axiomatised according to which the decision-maker evaluates acts using sets of probability functions which vary depending on the agent’s implausibility measure and on what is at stake in the choice of the act. The framework proposed yields a natural notion of comparative aversion to lack of confidence, or ambiguity aversion, and allows the definition of an ambiguity premium. It is shown that these notions are equivalent and can be characterised in terms of the implausibility measure representing the agent’s confidence. A simple portfolio example is presented.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 914.

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Length: 25 pages
Date of creation: 20 Feb 2009
Handle: RePEc:ebg:heccah:0914
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Keywords: Confidence; multiple priors; ambiguity aversion; ambiguity premium; implausibility measure;

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Find related papers by JEL classification:
  • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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  1. Epstein, Larry G & Zhang, Jiankang, 2001. "Subjective Probabilities on Subjectively Unambiguous Events," Econometrica, Econometric Society, vol. 69(2), pages 265-306, March.
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  11. Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
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Cited by:

  1. Brian Hill, 2012. "Confidence in preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 39(2), pages 273-302, July.

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