Solution of the Ellsberg paradox by means of the principle of uncertain future

MPRA Paper from University Library of Munich, Germany

Abstract: The principle of uncertain future: the probability of a future event contains an (hidden) uncertainty. The first consequence of the principle: the real values of high probabilities are lower than the preliminarily determined ones; conversely, the real values of low probabilities can be higher than the preliminarily determined ones. The first consequence provides an uniform solution of the underweighting of high and the overweighting of low probabilities, of the Allais paradox, risk aversion, loss aversion, the equity premium puzzle, the “fourfold pattern” paradox, etc. The second consequence: the present probability system of a future event is incomplete. The second consequence provides a solution of the incompleteness of systems of preferences, of ambiguity aversion, of the Ellsberg paradox, etc.

Keywords: uncertainty; risk; utility; choice; decisions; probability (search for similar items in EconPapers)
JEL-codes: D81 C5 A1 E17 B4 D01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-upt
Date: 2008-04-08
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