Ordering Ambiguous Acts

Sujoy Mukerji and Ian Jewitt

No 828, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: We investigate what it means for one act to be more ambiguous than another. The question is evidently analogous to asking what makes one prospect riskier than another, but beliefs are neither objective nor representable by a unique probability. Our starting point is an abstract class of preferences constructed to be (strictly) partially ordered by a more ambiguity averse relation. First, we define two notions of more ambiguous with respect to such a class. A more ambiguous (I) act makes an ambiguity averse decision maker (DM) worse off but does not affect the welfare of an ambiguity neutral DM. A more ambiguous (II) act adversely affects a more ambiguity averse DM more, as measured by the compensation they require to switch acts. Unlike more ambiguous (I), more ambiguous (II) does not require indifference of ambiguity neutral elements to the acts being compared. Second, we implement the abstract definitions to characterize more ambiguous (I) and (II) for two explicit preference families: a maxmin expected utility and smooth ambiguity. Thirdly, we give applications to the comparative statics of more ambiguous in a standard portfolio problem and a consumption-saving problem.

Keywords: Ambiguity; Uncertainty; Knightian Uncertainty; Ambiguity Aversion; Uncertainty aversion; Ellsberg paradox; Comparative statics; Single-crossing; More ambiguous; Portfolio choice (search for similar items in EconPapers)
JEL-codes: C44 D80 D81 G11 (search for similar items in EconPapers)
Date: 2017-07-20
New Economics Papers: this item is included in nep-cbe, nep-mic and nep-upt
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Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Ordering ambiguous acts (2017)
Working Paper: Ordering Ambiguous Acts (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:828

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