Ambiguity and the Variance of Gambles

Karl Whelan

No 202524, Working Papers from School of Economics, University College Dublin

Abstract: Ellsberg’s paradox shows that people prefer gambles with known probabilities to those where they are uncertain. Standard explanations rule out risk aversion by appealing to Savage’s (1954) subjective expected utility theory but this axiomatic approach leaves open other interpretations of the evidence. We provide a simpler argument: a routine application of the law of total variance shows that the variance of the payoff from a binary gamble is determined entirely by the mean probability belief, not by uncertainty about those beliefs. Ellsberg-type choices are not consistent with rational mean–variance evaluations of risk.

Keywords: Ellsberg’s; paradox (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Pages: 7 pages
Date: 2025-10
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10197/31893 First version, 2025 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 405 Not Allowed (http://hdl.handle.net/10197/31893 [302 Found]--> https://researchrepository.ucd.ie/handle/10197/31893)

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: https://EconPapers.repec.org/RePEc:ucn:wpaper:202524

Access Statistics for this paper

More papers in Working Papers from School of Economics, University College Dublin Contact information at EDIRC.
Bibliographic data for series maintained by UCD School of Economics ().