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A Hierarchy of Ambiguity Aversion

Research Cluster

Speaker:Lorenz Hartmann, University of Exeter
Date: Tuesday 20 March 2018
Time: 12:30
Location: Streatham Court, Lecture Theatre D

Further details

Abstract: In many decision situations, the probabilities of uncertain events are not known (“ambiguity"). Presently one of the most popular approaches for decision-making under ambiguity is Choquet expected utility theory here subjective beliefs are represented by non-additive set functions (“capacities"). A much debated question is how to characterize attitudes towards ambiguous uncertainty. In this paper, we propose a new conceptual framework which allows different levels of ambiguity aversion. An act maps states of nature to deterministic or random outcomes. Higher ambiguity aversion is characterized by a stronger preference for mixing between acts. We show that the popular notions of ambiguity aversion by Schmeidler (1989) and by Ghirardato and Marinacci (2002) are extreme cases of our larger framework which we refer to as hierarchy of ambiguity aversion. We provide an axiomatization of the whole hierarchy; a by-product being the axiomatization of Choquet expected utility theory with exact capacities.