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A subjective theory of compound lotteries

Haluk Ergin and Faruk Gul

No 152, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: We develop a Savage-type model of choice under uncertainty in which agents identify uncertain prospects with subjective compound lotteries. Our theory permits issue preference; that is, agents may not be indifferent among gambles that yield the same probability distribution if they depend on different issues. Hence, we establish subjective foundations for the Anscombe-Aumann framework and other models with two different types of probabilities. We define second-order risk as risk that resolves in the first stage of the compound lottery and show the equivalence of aversion to this risk with issue preference, the Ellsberg paradox, and uncertainty aversion

Keywords: issue preference; uncertainty aversion; Ellsberg paradox; Savage; compound lotteries (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mic
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