Arrow-Pratt-Type Measure of Ambiguity Aversion

Chiaki Hara ()
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Chiaki Hara: Institute of Economic Research, Kyoto University

No 1097, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We define a measure of ambiguity aversion for ambiguity-averse utility functions in a way analogous to the Arrow-Pratt measure of risk aversion. The measure is determined by the second Peano derivative, which exists even for non-differentiable functions, such as maximin and Choquet expected utility functions. Unlike the standard notion of comparative ambiguity aversion, it allows us to compare ambiguity aversion between two utility functions exhibiting different risk attitudes. We introduce a notion of ambiguity premium and show that our measure is related to the second-order, as opposed to the first-order, ambiguity premium. We also show that it is related to the first-order impact on matching probabilities of the size of prizes.

Keywords: Expected utility functions; risk aversion; ambiguity aversion; ambiguity premium; matching probabilities; Peano derivative (search for similar items in EconPapers)
JEL-codes: C38 D81 G11 (search for similar items in EconPapers)
Pages: 70pages
Date: 2023-09
New Economics Papers: this item is included in nep-mic and nep-upt
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