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Decision Making Under Ambiguity

Hillel J. Einhorn and Robin M. Hogarth
The Journal of Business
Vol. 59, No. 4, Part 2: The Behavioral Foundations of Economic Theory (Oct., 1986), pp. S225-S250
Stable URL: http://www.jstor.org/stable/2352758
Page Count: 26
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Decision Making Under Ambiguity
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Abstract

Ellsberg's paradox shows that ambiguous probabilities derived from choices between gambles are not coherent. A descriptive model of judgment under ambiguity is developed in which an initial estimate serves as an anchor and adjustments are made for ambiguity via a mental simulation process. The model specifies conditions for ambiguity seeking and avoidance and sub- and superadditivity of complementary probabilities. Three experiments involving Ellsberg's paradox and the setting of buying and selling prices for insurance and a warranty test the model. A choice rule under ambiguity is proposed that implies the nonindependence of ambiguous probabilities and the sign of payoff utilities. Extensions of the model to choices with explicit probabilities and the handling of context effects are discussed.

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