Source Theory: A Tractable and Positive Ambiguity Theory

Aurélien Baillon (), Han Bleichrodt (), Chen Li () and Peter P. Wakker ()
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Aurélien Baillon: emlyon business school, CNRS, Université Lumière Lyon 2, Université Jean Monnet Saint-Etienne, GATE, 69007 Lyon, France
Han Bleichrodt: Department of Economics (FAE), University of Alicante, 03690 Alicante, Spain
Chen Li: Erasmus School of Economics, Erasmus University, 3000 DR Rotterdam, Netherlands
Peter P. Wakker: Erasmus School of Economics, Erasmus University, 3000 DR Rotterdam, Netherlands

Management Science, 2025, vol. 71, issue 10, 8767-8782

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
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:10:p:8767-8782

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