Ambiguity Made Precise: A Comparative Foundation and Some Implications

Paolo Ghirardato and Massimo Marinacci

No 1026, Working Papers from California Institute of Technology, Division of the Humanities and Social Sciences

Abstract: The theory of subjective expected utility (SEU) has been recently extended to allow ambiguity to matter for choice. We propose a notion of absolute ambiguity aversion by building on a notion of comparative ambiguity aversion. We characterize it for a preference model which encompasses some of the most popular models in the literature. We next build on these ideas to provide a definition of unambiguous act and event, and show the characterization of the latter. As an illustration, we consider the classical Ellsberg 3-color urn problem and find that the notions developed in the paper provide intuitive answers.

Keywords: Ambiguity Aversion; Cardinal Risk Aversion; Choquet Expected Utility; Maxmin Expected Utility; Biseparable Preferences (search for similar items in EconPapers)
Pages: 38 pages
Date: 1997-11
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