Stochastically independent randomization and uncertainty aversion

Peter Klibanoff ()
Additional contact information
Peter Klibanoff: Department of Managerial Economics and Decision Sciences, Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208, USA

Economic Theory, 2001, vol. 18, issue 3, pages 605-620

Abstract: This paper proposes a preference-based condition for stochastic independence of a randomizing device in a product state space. This condition is applied to investigate some classes of preferences that allow for both independent randomization and uncertainty or ambiguity aversion (a la Ellsberg). For example, when imposed on Choquet Expected Utility (CEU) preferences in a Savage framework displaying uncertainty aversion in the spirit of Schmeidler [27], it results in a collapse to Expected Utility (EU). This shows that CEU preferences that are uncertainty averse in the sense of Schmeidler should not be used in settings where independent randomization is to be allowed. In contrast, Maxmin EU with multiple priors preferences continue to allow for a very wide variety of uncertainty averse preferences when stochastic independence is imposed. Additionally, these points are used to reexamine some recent arguments against preference for randomization with uncertainty averse preferences. In particular, these arguments are shown to rely on preferences that do not treat randomization as a stochastically independent event.

Keywords: Uncertainty aversion; Stochastic independence; Preference for randomization; Ambiguity aversion. (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2001-06-11
Note: Received: February 10, 2000; revised version: March 30, 2000
References: Add references at CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://link.springer.de/link/service/journals/00199/papers/1018003/10180605.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:spr:joecth:v:18:y:2001:i:3:p:605-620

Ordering information: This journal article can be ordered from
http://link.springer.de/orders.htm

Access Statistics for this article

Economic Theory is edited by Nichoals Yanneils

More articles in Economic Theory from Springer
Series data maintained by Guenther Eichhorn ().