Solutions For Some Dynamic Problems With Uncertainty Aversion

Hiroyuki Ozaki and Peter Streufert

The Japanese Economic Review, 2001, vol. 52, issue 3, 251-283

Abstract: In a discounted expected‐utility problem, tomorrow's utilities are aggregated across tomorrow's states by the expectation operator. In our problems, this aggregation is accomplished by a Choquet integral of the form ∫u dPα, where α specifies uncertainty aversion. We solve all finite‐state problems by either a closed form or a finite‐dimensional iteration, and show that uncertainty aversion reduces the perceived return on investment, thereby decreasing the saving rate given elastic preferences and increasing the saving rate given inelastic preferences. JEL Classification Numbers: C61, D81, D9.

Date: 2001
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https://doi.org/10.1111/1468-5876.00194

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Working Paper: Solutions to Some Dynamic Problems with Uncertainty Aversion (1999)
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