Source Theory: A Tractable and Positive Ambiguity Theory

Aurélien Baillon (baillon@em-lyon.com), Han Bleichrodt, Chen Li and Peter P. Wakker
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Aurélien Baillon: EM - EMLyon Business School, GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne - EM - EMLyon Business School - CNRS - Centre National de la Recherche Scientifique
Han Bleichrodt: Universidad de Alicante
Chen Li: Erasmus University Rotterdam
Peter P. Wakker: Erasmus University Rotterdam

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Abstract: This paper introduces source theory, a new theory for decision under ambiguity (unknown probabilities). It shows how Savage's subjective probabilities, with source-dependent nonlinear weighting functions, can model Ellsberg's ambiguity. It can do so in Savage's framework of state-contingent assets, permits nonexpected utility for risk, and avoids multistage complications. It is tractable, shows ambiguity attitudes through simple graphs, is empirically realistic, and can be used prescriptively. We provide a new tool to analyze weighting functions: pmatchers. They give Arrow–Pratt-like transformations but operate "within" rather than "outside" functions. We further show that ambiguity perception and inverse S probability weighting, seemingly unrelated concepts, are two sides of the same "insensitivity" coin.

Keywords: subjective beliefs; ambiguity aversion; Ellsberg paradox; source of uncertainty (search for similar items in EconPapers)
Date: 2025-02-12
New Economics Papers: this item is included in nep-mic
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Published in Management Science, In press, 16 p. ⟨10.1287/mnsc.2023.03307⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04964898

DOI: 10.1287/mnsc.2023.03307

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