Mean-dispersion preferences and constant absolute uncertainty aversion

Simon Grant and Ben Polak

Journal of Economic Theory, 2013, vol. 148, issue 4, 1361-1398

Abstract: We axiomatize, in an Anscombe–Aumann framework, the class of preferences that admit a representation of the form V(f)=μ−ρ(d), where μ is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and ρ(d) is a measure of (aversion to) dispersion that corresponds to an uncertainty premium. The key feature of these mean-dispersion preferences is that they exhibit constant absolute uncertainty aversion. This class includes many well-known models of preferences from the literature on ambiguity. We show what properties of the dispersion function ρ(⋅) correspond to known models, to probabilistic sophistication, and to some new notions of uncertainty aversion.

Keywords: Ambiguity aversion; Translation invariance; Dispersion; Uncertainty; Probabilistic sophistication (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (49)

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Related works:
Working Paper: Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:148:y:2013:i:4:p:1361-1398

DOI: 10.1016/j.jet.2012.11.003

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