scholarly journals Discriminating Between Models of Ambiguity Attitude: a Qualitative Test

2019 ◽  
Vol 18 (2) ◽  
pp. 708-749 ◽  
Author(s):  
Robin Cubitt ◽  
Gijs van de Kuilen ◽  
Sujoy Mukerji
Keyword(s):  
Economic Theory ◽  
Expected Utility ◽  
Maxmin Expected Utility ◽  
Smooth Ambiguity Model ◽  
New Models ◽  
Qualitative Test ◽  
Behavioral Issue ◽  
Ambiguity Attitude

AbstractDuring recent decades, many new models have emerged in pure and applied economic theory according to which agents’ choices may be sensitive to ambiguity in the uncertainty that faces them. The exchange between Epstein (2010) and Klibanoff et al. (2012) identified a notable behavioral issue that distinguishes sharply between two classes of models of ambiguity sensitivity that are importantly different. The two classes are exemplified by the α-maxmin expected utility (MEU) model and the smooth ambiguity model, respectively; and the issue is whether or not a desire to hedge independently resolving ambiguities contributes to an ambiguity-averse agent's preference for a randomized act. Building on this insight, we implement an experiment whose design provides a qualitative test that discriminates between the two classes of models. Among subjects identified as ambiguity sensitive, we find greater support for the class exemplified by the smooth ambiguity model; the relative support is stronger among subjects identified as ambiguity averse. This finding has implications for applications that rely on specific models of ambiguity preference.

Ambiguity and Probabilistic Information

2020 ◽  
Author(s):  
Adam Dominiak ◽  
Jean-Philippe Lefort
Keyword(s):  
Economic Theory ◽  
Decision Analysis ◽  
Expected Utility ◽  
Choice Behavior ◽  
Ambiguity Aversion ◽  
Thought Experiments ◽  
Choquet Expected Utility ◽  
Canonical Models ◽  
Maxmin Expected Utility ◽  
Probabilistic Information

Experiments detecting ambiguity aversion often rely on the assumption that probabilities are exogenously given for some uncertain events. However, the canonical models that accommodate ambiguity into economic theory, such as the maxmin expected utility (MEU) and Choquet expected utility (CEU) models, are purely subjective. These models do not specify how subjects could incorporate exogenous probabilities into decisions. We study two approaches for embedding exogenous probabilities in the context of the thought experiments suggested by Mark Machina. We show that Machina’s choice behavior entails fundamentally different consequences for the ambiguity models mentioned; although it violates the CEU model, it is consistent with the MEU model. For the latter model, Machina’s experiments can test whether individuals adhere to expected utility for prospects whose consequences occur with the exogenously given probabilities. This paper was accepted by Manel Baucells, decision analysis.

Comparative Risk Aversion in the Presence of Ambiguity

2016 ◽  
Vol 8 (3) ◽  
pp. 51-63
Author(s):  
Marie-Charlotte Guetlein
Keyword(s):  
Risk Aversion ◽  
Expected Utility ◽  
Smooth Ambiguity Model ◽  
Comparative Risk ◽  
Comparative Risk Aversion ◽  
Increases In Risk ◽  
Ambiguity Attitude ◽  
Increase In Risk

This paper suggests a characterization of increases in risk aversion within the smooth ambiguity model by Klibanoff, Marinacci, and Mukerji (2005). I show that an increase in risk aversion is qualitatively different from that under expected utility, due to the incomplete separation between risk and ambiguity attitude. The analysis clarifies how ambiguity perception and attitude depend on risk aversion. (JEL D81)

If It Is Surely Better, Do It More? Implications for Preferences Under Ambiguity

2021 ◽  
Author(s):  
Soheil Ghili ◽  
Peter Klibanoff
Keyword(s):  
Expected Utility ◽  
Ambiguity Aversion ◽  
Upper Bounds ◽  
Maxmin Expected Utility ◽  
Weak Dominance ◽  
Choice Under Uncertainty ◽  
Tight Connection ◽  
Sales Agent ◽  
Utility Preferences ◽  
Sensitive Behavior

Consider a canonical problem in choice under uncertainty: choosing from a convex feasible set consisting of all (Anscombe–Aumann) mixtures of two acts f and g, [Formula: see text]. We propose a preference condition, monotonicity in optimal mixtures, which says that surely improving the act f (in the sense of weak dominance) makes the optimal weight(s) on f weakly higher. We use a stylized model of a sales agent reacting to incentives to illustrate the tight connection between monotonicity in optimal mixtures and a monotone comparative static of interest in applications. We then explore more generally the relation between this condition and preferences exhibiting ambiguity-sensitive behavior as in the classic Ellsberg paradoxes. We find that monotonicity in optimal mixtures and ambiguity aversion (even only local to an event) are incompatible for a large and popular class of ambiguity-sensitive preferences (the c-linearly biseparable class. This implies, for example, that maxmin expected utility preferences are consistent with monotonicity in optimal mixtures if and only if they are subjective expected utility preferences. This incompatibility is not between monotonicity in optimal mixtures and ambiguity aversion per se. For example, we show that smooth ambiguity preferences can satisfy both properties as long as they are not too ambiguity averse. Our most general result, applying to an extremely broad universe of preferences, shows a sense in which monotonicity in optimal mixtures places upper bounds on the intensity of ambiguity-averse behavior. This paper was accepted by Manel Baucells, decision analysis.

Full Implementation under Ambiguity

2021 ◽  
Vol 13 (1) ◽  
pp. 148-178
Author(s):  
Huiyi Guo ◽  
Nicholas C. Yannelis
Keyword(s):  
Social Choice ◽  
Expected Utility ◽  
Sufficient Conditions ◽  
Choice Functions ◽  
Maxmin Expected Utility ◽  
Special Cases ◽  
Social Choice Functions ◽  
Bayesian Implementation ◽  
Pareto Efficient ◽  
Choice Set

This paper introduces the maxmin expected utility framework into the problem of fully implementing a social choice set as ambiguous equilibria. Our model incorporates the Bayesian framework and the Wald-type maxmin preferences as special cases and provides insights beyond the Bayesian implementation literature. We establish necessary and almost sufficient conditions for a social choice set to be fully implementable. Under the Wald-type maxmin preferences, we provide easy-to-check sufficient conditions for implementation. As applications, we implement the set of ambiguous Pareto-efficient and individually rational social choice functions, the maxmin core, the maxmin weak core, and the maxmin value. (JEL D71, D81, D82)

scholarly journals Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses

2015 ◽  
Vol 7 (2) ◽  
pp. 77-100 ◽  
Author(s):  
Aurélien Baillon ◽  
Han Bleichrodt
Keyword(s):  
Expected Utility ◽  
Ambiguity Aversion ◽  
Choquet Expected Utility ◽  
Maxmin Expected Utility ◽  
Stock Indices ◽  
Descriptive Validity ◽  
Utility Models ◽  
Ambiguity Attitudes ◽  
Gains And Losses ◽  
Fourfold Pattern

This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity attitudes: ambiguity aversion for likely gains and unlikely losses and ambiguity seeking for unlikely gains and likely losses. Our data are most consistent with prospect theory and, to a lesser extent, α-maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns. (JEL D81, D83, G11, G12, G14)

scholarly journals Optimal Insurance under Maxmin Expected Utility

2020 ◽  
Author(s):  
Corina Birghila ◽  
Tim J. Boonen ◽  
Mario Ghossoub
Keyword(s):  
Expected Utility ◽  
Maxmin Expected Utility ◽  
Optimal Insurance

Purely subjective Maxmin Expected Utility

2014 ◽  
Vol 152 ◽  
pp. 382-412 ◽  
Author(s):  
Shiri Alon ◽  
David Schmeidler
Keyword(s):  
Expected Utility ◽  
Maxmin Expected Utility

scholarly journals DISAPPOINTMENT AVERSION PREMIUM PRINCIPLE

2015 ◽  
Vol 45 (3) ◽  
pp. 679-702 ◽  
Author(s):  
Ka Chun Cheung ◽  
Wing Fung Chong ◽  
Robert Elliott ◽  
Sheung Chi Phillip Yam
Keyword(s):  
Economic Theory ◽  
Expected Utility ◽  
Translation Invariance ◽  
Regulatory Requirement ◽  
Behavioral Economic ◽  
Disappointment Aversion ◽  
Explicit Representations ◽  
Behavioral Economic Theory

AbstractIn recent years, the determination of premium principle under various non-expected utility frameworks has become popular, such as the pioneer works by Tsanakas and Desli (2003) and Kaluszka and Krzeszowiec (2012). We here revisit the problem under another prevalent behavioral economic theory, namely the Disappointment Aversion (DA) Theory proposed by Gul (1991). In this article, we define and study the properties of theDA premium principle, which builds on the equivalent utility premium principle. We derive various properties of this premium principle, such as non-negative and no unjustified risk loading, translation invariance, monotonicity, convexity, positive (non-)homogeneity, independent (non-)additivity, comonotonic (non-)additivity and monotonicity with respect to the extent of disappointment. A generalized Arrow–Pratt approximation is also established. Explicit representations of the premium principle are obtained for linear and exponential utilities, and they reveal that the premium principle proposed echoes the capital reserve regulatory requirement in practice.

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