Pessimism and optimism towards new discoveries

Adam Dominiak and Ani Guerdjikova ()
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Adam Dominiak: Virginia Tech [Blacksburg]
Ani Guerdjikova: GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes

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Abstract: In this paper, we provide an axiomatic foundation of pessimism and optimism towards ambiguity that emerges due to growing awareness. In our setup, this corresponds to a discovery of finer "descriptions" of the original contingencies (states). A decision-maker can form subjective probabilistic beliefs on the original state space and behaves as an expected utility maximizer. However, as finer contingencies are discovered, he may perceive ambiguity with respect to the newly identified states and thus be unable to extend her initial probabilistic beliefs to the expanded state space in an additive way. As a result, the decision-maker's new beliefs are now "ambiguous" and represented by a probability distribution combined, for each refinement of an original state, with a degree of confidence in this probability estimate. We provide a parametric representation of preferences, identify the DM's degree of ambiguity as well as his attitude towards ambiguity as captured by the degree of optimism and pessimism. We illustrate the relation of our model to some well-known capacities, such as the E-capacities introduced by Eichberger and Kelsey (Theory Decis 46:107-140, 1999), the JP-capacities of Jaffray and Philippe (Math Oper Res 22:165-185, 1997) and the NEO-additive capacities developed by Chateauneuf et al. (J Econ Theory, 137:538-567, 2007).

Keywords: Unawareness; Ambiguity; Subjective expected utility; Capacities; Choquet expected utility; Parametric model; Confidence; Pessimism; Optimism; Conditional preferences (search for similar items in EconPapers)
Date: 2021-05
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Citations: View citations in EconPapers (1)

Published in Theory and Decision, 2021, 90 (3-4), pp.321-370. ⟨10.1007/s11238-021-09808-1⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03722139

DOI: 10.1007/s11238-021-09808-1

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