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The impact of ambiguity and prudence on prevention decisions

Loïc Berger

Theory and Decision, 2016, vol. 80, issue 3, 389-409

Abstract: Abstract Most decisions concerning (self-)insurance and self-protection have to be taken in situations in which (a) the effort exerted precedes the moment uncertainty realizes, and (b) the probabilities of future states of the world are not perfectly known. By integrating these two characteristics in a simple theoretical framework, this paper derives plausible conditions under which ambiguity aversion raises the demand for (self-)insurance and self-protection. In particular, it is shown that in most usual situations where the level of ambiguity does not increase with the level of effort, a simple condition of ambiguity prudence known as decreasing absolute ambiguity aversion (DAAA) is sufficient to give a clear and positive answer to the question: Does ambiguity aversion raise the optimal level of effort?

Keywords: Non-expected utility; Self-protection; Self-insurance; Ambiguity; Prudence (search for similar items in EconPapers)
JEL-codes: D61 D81 D91 G11 (search for similar items in EconPapers)
Date: 2016
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