Subjective Risk, Confidence, and Ambiguity

Christian Traeger

Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: The paper incorporates qualitative differences of probabilistic beliefs into a rational (or normatively motivated) decision framework. Probabilistic beliefs can range from objective probabilities to pure guesstimates. The decision maker in the present model takes into account his confidence in beliefs when evaluating general uncertain situations. From an axiomatic point of view, the approach stays as close as possible to the widespread von Neumann-Morgenstern framework. The resulting representation uses only basic tools from risk analysis, but employs them recursively. The paper extends the concept of smooth ambiguity aversion to a more general notion of aversion to the subjectivity of belief. As a special case, the framework permits a threefold disentanglement of intertemporal substitutability, Arrow-Pratt risk aversion, and smooth ambiguity aversion. A decision maker’s preferences can nest a variety of widespread decision criteria, which are selected according to his confidence in the uncertainty assessment of a particular setting.

Keywords: ambiguity; confidence; subjective beliefs; expected utility; intertemporal substitutability; intertemporal risk aversion; recursive utility; uncertainty; climate change; behavior; Social and Behavioral Sciences (search for similar items in EconPapers)
Date: 2011-05-01
New Economics Papers: this item is included in nep-hpe, nep-mic and nep-upt
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