Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion

Simon Grant and Ben Polak ()
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Ben Polak: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/benjamin-polak

No 1805, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We axiomatize, in an Anscombe-Aumann framework, the class of preferences that admit a representation of the form V(f) = mu - rho(d), where mu is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and rho(d) is a measure of (aversion to) dispersion that corresponds to an uncertainty premium. The key feature of these mean-dispersion preferences is that they exhibit constant absolute uncertainty aversion. This class includes many well-known models of preferences from the literature on ambiguity. We show what properties of the dispersion function rho(dot) correspond to known models, to probabilistic sophistication, and to some new notions of uncertainty aversion.

Keywords: Ambiguity aversion; Translation invariance; Dispersion; Uncertainty; Probabilistic sophistication (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2011-06
New Economics Papers: this item is included in nep-upt
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Mean-dispersion preferences and constant absolute uncertainty aversion (2013)
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