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A Bayesian Approach to Uncertainty Aversion

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  • Feltkamp, Vincent
  • Halevy, Yoram

Abstract

The Ellsberg Paradox demonstrates that people's belief over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of several positively correlated problems - she will be uncertainty averse. We generalize this argument and derive sufficient conditions for uncertainty aversion.

Suggested Citation

  • Feltkamp, Vincent & Halevy, Yoram, 2004. "A Bayesian Approach to Uncertainty Aversion," Microeconomics.ca working papers halevy-04-02-13-07-48-37, Vancouver School of Economics, revised 25 Feb 2014.
  • Handle: RePEc:ubc:pmicro:halevy-04-02-13-07-48-37
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    File URL: http://faculty.arts.ubc.ca/yhalevy/HalevyFeltkampRES2005.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Ellsberg Paradox; rule rationality; ambiguity aversion; risk aversionm subjective probability; reduction of compound lotteries;
    All these keywords.

    JEL classification:

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

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