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Solutions to Some Dynamic Problems with Uncertainty Aversion

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Abstract

In a discounted expected-utility problem, tomorrow's utilities are aggregated across tomorrow's states by the expectation operator. In our problems, this aggregation is accomplished by a Choquet integral of the form iudP a, where a specifies uncertainty aversion. We solve all finite-state problems by either a closed form or a finite-dimensional iteration, and show that uncertainty aversion reduces the perceived return on investment, thereby decreasing the saving rate given elastic preferences and increasing the saving rate given inelastic preferences.

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  • Hiroyuki Ozaki & Peter A. Streufert, 1999. "Solutions to Some Dynamic Problems with Uncertainty Aversion," University of Western Ontario, Departmental Research Report Series 9912, University of Western Ontario, Department of Economics.
    • Handle: RePEc:uwo:uwowop:9912
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    Cited by:

    1. Kiyohiko G. Nishimura & Hiroyuki Ozaki, 2014. "Liquidity Preference And Knightian Uncertainty," CARF F-Series CARF-F-337, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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