Ambiguity and Probabilistic information

Adam Dominiak and Jean-Philippe Lefort
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Jean-Philippe Lefort: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Experiments detecting ambiguity aversion often rely on the assumption that probabilities are exogenously given for some uncertain events. However, the canonical models that accommodate ambiguity into economic theory, such as the maxmin expected utility (MEU) and Choquet expected utility (CEU) models, are purely subjective. These models do not specify how subjects could incorporate exogenous probabilities into decisions. We study two approaches for embedding exogenous probabilities in the context of the thought experiments suggested by Mark Machina. We show that Machina's choice behavior entails fundamentally different consequences for the ambiguity models mentioned; although it violates the CEU model, it is consistent with the MEU model. For the latter model, Machina's experiments can test whether individuals adhere to expected utility for prospects whose consequences occur with the exogenously given probabilities.

Keywords: Ambiguity; experiments; paradoxes; exogenous probabilities; probabilistic sophistication; Choquet expected utility; α-maxmin expected utility; smooth ambiguity model (search for similar items in EconPapers)
Date: 2021-11
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Citations: View citations in EconPapers (1)

Published in Management Science, 2021, 67 (7)

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-04002664

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