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Ambiguity models and the Machina paradoxes

Author

Listed:
  • Laetitia Placido

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

  • Aurélien Baillon

    (GRID - Groupe de Recherche sur le risque, l'Information et la Décision - ENS Cachan - École normale supérieure - Cachan - CNRS - Centre National de la Recherche Scientifique)

  • Olivier l'Haridon

    () (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, UP4 - Université Paris-Sorbonne)

Abstract

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results. (JEL D81)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Laetitia Placido & Aurélien Baillon & Olivier l'Haridon, 2011. "Ambiguity models and the Machina paradoxes," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00645899, HAL.
    • Handle: RePEc:hal:cesptp:hal-00645899
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00645899
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    References listed on IDEAS

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    1. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," American Economic Review, American Economic Association, vol. 97(2), pages 1-30, May.
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    More about this item

    Keywords

    Machina paradox; Choquet expected utility; Maxmin expected utility;

    JEL classification:

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

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