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Smooth Ambiguity Aversion in the Small and in the Large

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  • Loïc Berger

Abstract

In this paper I use the smooth ambiguity model developed by Klibanoff, Marinacci, and Mukerji (2005) to define the concepts of ambiguity and uncertainty premia in a way analogous to what Pratt (1964) did in the risk theory literature. I show that those concepts may be useful to quantify the effect ambiguity has on the welfare of economic agents. I also provide local approximations of these premia and show the link that exists between them when comparing different degrees of ambiguity aversion not only in the small, but also in the large.

Suggested Citation

  • Loïc Berger, 2011. "Smooth Ambiguity Aversion in the Small and in the Large," Working Papers ECARES ECARES 2011-020, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/95831
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    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/95831/4/2011-020-BERGER_smooth.pdf
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    References listed on IDEAS

    as
    1. Johanna Etner & Meglena Jeleva & Jean-Marc Tallon, 2009. "Decision theory under uncertainty," Documents de travail du Centre d'Economie de la Sorbonne 09064, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Nov 2009.
    2. Loïc Berger, 2011. "Does Ambiguity Aversion Raise the Optimal Level of Effort? A Two-Period Model," Working Papers ECARES ECARES 2011-021, ULB -- Universite Libre de Bruxelles.
    3. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    4. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    5. Larry G. Epstein, 2010. "A Paradox for the “Smooth Ambiguity” Model of Preference," Econometrica, Econometric Society, vol. 78(6), pages 2085-2099, November.
    6. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, pages 280-289.
    7. Arthur Snow, 2010. "Ambiguity and the value of information," Journal of Risk and Uncertainty, Springer, vol. 40(2), pages 133-145, April.
    8. LANGE Andreas & TREICH Nicolas, 2007. "Uncertainty, Learning and Ambiguity in Economic Models on Climate Policy: Some Classical Results and New Directions," LERNA Working Papers 07.16.237, LERNA, University of Toulouse.
    9. Raphaël Giraud & Jean-Marc Tallon, 2011. "Are beliefs a matter of taste? A case for objective imprecise information," Theory and Decision, Springer, pages 23-31.
    10. repec:eee:jetheo:v:171:y:2017:i:c:p:213-267 is not listed on IDEAS
    11. Einhorn, Hillel J & Hogarth, Robin M, 1986. "Decision Making under Ambiguity," The Journal of Business, University of Chicago Press, vol. 59(4), pages 225-250, October.
    12. Siniscalchi, Marciano, 2009. "Two Out Of Three Ain'T Bad: A Comment On “The Ambiguity Aversion Literature: A Critical Assessment”," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 335-356, November.
    13. Christian Gollier, 2011. "Portfolio Choices and Asset Prices: The Comparative Statics of Ambiguity Aversion," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1329-1344.
    14. Raphaël Giraud & Jean-Marc Tallon, 2011. "Are beliefs a matter of taste? A case for objective imprecise information," Theory and Decision, Springer, pages 23-31.
    15. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, pages 280-289.
    16. Jewitt, Ian & Mukerji, Sujoy, 2017. "Ordering ambiguous acts," Journal of Economic Theory, Elsevier, vol. 171(C), pages 213-267.
    17. Al-Najjar, Nabil I. & Weinstein, Jonathan, 2009. "The Ambiguity Aversion Literature: A Critical Assessment," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 249-284, November.
    18. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    19. Al-Najjar, Nabil I. & Weinstein, Jonathan, 2009. "Rejoinder: The “Ambiguity Aversion Literature: A Critical Assessment”," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 357-369, November.
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    Citations

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    Cited by:

    1. Berger, Loïc, 2014. "Precautionary saving and the notion of ambiguity prudence," Economics Letters, Elsevier, vol. 123(2), pages 248-251.
    2. Loïc Berger, 2016. "The impact of ambiguity and prudence on prevention decisions," Theory and Decision, Springer, pages 389-409.
    3. Loïc Berger, 2014. "The Impact of Ambiguity Prudence on Insurance and Prevention," Working Papers ECARES ECARES 2014-08, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    ambiguity aversion; non-expected utility; uncertainty;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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