Showing papers on "Ambiguity aversion published in 1998"

Ambiguity made precise: a comparative foundation

Abstract: There is no doubt that the subjective expected utility (SEU) theory of decision making under uncertainty of Savage (1954) is solidly established as the choice-theoretic underpinning of modern economic theory. However, Ellsberg (1961)'s famous thought experiment shows that SEU cannot take into account the possibility that the information a decision maker (DM) has about some uncertain event (that is relevant to her choice) be vague or imprecise, and that such "ambiguity" might affect her behavior.

Testing risk aversion and nonexpected utility theories

Abstract: This paper tests risk aversion and compares several nonexpected utility theories using paired comparisons. Economic hypotheses associated with risk aversion are found not to hold in preference data. Expected utility with rank dependent probability is found to provide a smooth representation of preference for a wide range of preference types.

Transparency preference and economic behavior

Abstract: It is shown that decision makers guided by Popperian epistemology will have a preference for transparency, even in situations where standard economic theory provides no rationale for such a preference. This provides a Popperian resolution of the Ellsberg paradox, and a rationale for suspicion in experiments as well as in economic life.

Uncertainty aversion in a simple insurance model

Abstract: A simple insurance model is considered where the distribution of accident probabilities in the population is known, but where the actual probability of each policyholder is unknown to both insurers and the policyholder himself. It is shown that if policyholders are uncertainty averse, deductibles are distorted downwards. A complete view of insurance in such circumstances need thus consider trade in uncertainty as well as risk.

An Entropy Risk Aversion in Portfolio Selection

Abstract: The involved risk in choosing investments, in the most of cases, is characterized and composed in manifold factors. The global risk is broken up in different attributes and it is decomposed in hierachical levels. Then, by concept of attractiveness, for each action, an evaluation is made, taking into account the weights assigned to each attribute, considered through its related partial risk. With respect to an ideal point, representing the solution risk-free, by the concept of entropy, an index is computed. In such a way it is possible to carry out an absolute degree of risk and to achieve the comparisons between the different alternatives and to single out their ranking.

Ambiguity Aversion and Incompleteness of Contractual Form

Abstract: Subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events. In such an instance, the decision maker's beliefs are better represented by a set of probability functions than by a unique probability function. An ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds. The non-additive expected utility model allows a formal characterization of such behavior. Using this model, this paper shows that ambiguity aversion can explain the existence of incomplete contracts. The setting for the demonstration is the investment hold-up model which has been the focus of much of the recent research on the implications of incomplete contracts.

Ellsberg's urns, ambiguity, measures of uncertainty and non-additivity : some experimental evidence

Abstract: The principal objective of the experiment reported on in this paper was to ascertain what measures of uncertainty the subjects deemed to be relevant in situations of ambiguity regarding outcomes. This permitted an assessment of non-additivity of probabilities and subjects' choices were then analysed in terms of expected utility theory and the decision theories of Shackle and Ford. In addition, a comparison of the findings on the choices of gamble that the subjects made could be effected with those made in Ellsberg's pioneering inquiry.

The Value of Information in Some General Equilibrium Models

Abstract: The paper generalizes Blackwell's theorem, according to which the welfare effects of an improvement in information are positive to certain class equilibrium production economies. The consumer preferences in this class of economies exhibit either constant relative risk of constant risk aversion or constant absolute risk aversion. We also demonstrate that the introduction of risk sharing markets may invalidate the blackwll result.

Value of Life, Value of Time, and Constant Relative Risk Aversion Utility

Abstract: This paper develops two straightforward value of life models; one is a probabilistic value of life model and the second is a determinstic value of time model. Simplifying assumptions allow both models to be solved analytically. Constant relative risk aversion utility functions are used, and both value of life and value of time are solved for a functions of the relative risk-aversion parameter.

Uncertainty Aversion and Backward Induction É

Abstract: In the context of the centipede game this paper discusses a solution concept for extensive games that is based on subgame perfection and uncertainty aversion. Players who deviate from the equilibrium path are considered non- rational. Rational players who face non-rational opponents face genuine uncertainty and may have non-additive beliefs about their future play. Rational players are boundedly uncertainty averse and maximise Choquet expected utility. It is shown that if the centipede game is sufficiently long, then the equilibrium strategy is to play `Across' early in the game and to play `Down' late in the game.

Cournot Competition Under Knightian Uncertainty

Abstract: This article applies a theorem of Nash equilibrium under uncertainty (Dow & Werlang, 1994) to the classic Cournot model of oligopolistic competition. It shows, in particular, how one can map all Cournot-Nash equilibria (which includes the cartel and the null solutions) to only a function of the uncertainty aversion coefficients of the producers. The effects of these parameters on the symmetric equilibrium quantities and output are examined in a comparative statics analysis, under two alternative assumptions: a closed market with an exogenous number of firms and a free-entry/exit regime. In both cases, a collusive effect of the uncertainty aversion on the production is obtained. Under rather few restrictive assumptions, there is a symmetric uncertainty aversion level for the producers at which their optimal quantities and the industry output become equal to the optimal counterpart cartel's outcomes. These results improve upon the literature on collusion since, in contrast to other analogous findings, they enhance that a cooperative cartel may be endogenously generated in a one-shot (noncooperative) game played by uncertainty averse producers. For the competitive case (under free-entry/exit) the paper shows that Cournotian competition among weakely or moderately uncertainty averse producers entails a higher industry output (if the market is large and/or entry is easy) and surely entails lower optimal quantities for the firms than those achieved under uncertainty neutrality. Thus, competition under free-entry/exit in a Knightian uncertainty environment should act to prevent monopoly power for the individual firms.