Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support

A Smooth Model of Decision Making under Ambiguity

Peter Klibanoff, Massimo Marinacci and Sujoy Mukerji
Econometrica
Vol. 73, No. 6 (Nov., 2005), pp. 1849-1892
Published by: The Econometric Society
Stable URL: http://www.jstor.org/stable/3598753
Page Count: 44
  • Read Online (Free)
  • Download ($10.00)
  • Subscribe ($19.50)
  • Cite this Item
If you need an accessible version of this item please contact JSTOR User Support
A Smooth Model of Decision Making under Ambiguity
Preview not available

Abstract

We propose and characterize a model of preferences over acts such that the decision maker prefers act f to act g if and only if ${\Bbb E}_{\mu}\phi ({\Bbb E}_{\pi }u\circ f)\geq {\Bbb E}_{\mu}\phi ({\Bbb E}_{\pi }u\circ g)$, where E is the expectation operator, u is a von Neumann-Morgenstern utility function, φ is an increasing transformation, and μ is a subjective probability over the set Π of probability measures π that the decision maker thinks are relevant given his subjective information. A key feature of our model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. We show that attitudes toward pure risk are characterized by the shape of u, as usual, while attitudes toward ambiguity are characterized by the shape of φ. Ambiguity itself is defined behaviorally and is shown to be characterized by properties of the subjective set of measures Π. One advantage of this model is that the well-developed machinery for dealing with risk attitudes can be applied as well to ambiguity attitudes. The model is also distinct from many in the literature on ambiguity in that it allows smooth, rather than kinked, indifference curves. This leads to different behavior and improved tractability, while still sharing the main features (e.g., Ellsberg's paradox). The maxmin expected utility model (e.g., Gilboa and Schmeidler (1989)) with a given set of measures may be seen as a limiting case of our model with infinite ambiguity aversion. Two illustrative portfolio choice examples are offered.

Page Thumbnails

  • Thumbnail: Page 
1849
    1849
  • Thumbnail: Page 
1850
    1850
  • Thumbnail: Page 
1851
    1851
  • Thumbnail: Page 
1852
    1852
  • Thumbnail: Page 
1853
    1853
  • Thumbnail: Page 
1854
    1854
  • Thumbnail: Page 
1855
    1855
  • Thumbnail: Page 
1856
    1856
  • Thumbnail: Page 
1857
    1857
  • Thumbnail: Page 
1858
    1858
  • Thumbnail: Page 
1859
    1859
  • Thumbnail: Page 
1860
    1860
  • Thumbnail: Page 
1861
    1861
  • Thumbnail: Page 
1862
    1862
  • Thumbnail: Page 
1863
    1863
  • Thumbnail: Page 
1864
    1864
  • Thumbnail: Page 
1865
    1865
  • Thumbnail: Page 
1866
    1866
  • Thumbnail: Page 
1867
    1867
  • Thumbnail: Page 
1868
    1868
  • Thumbnail: Page 
1869
    1869
  • Thumbnail: Page 
1870
    1870
  • Thumbnail: Page 
1871
    1871
  • Thumbnail: Page 
1872
    1872
  • Thumbnail: Page 
1873
    1873
  • Thumbnail: Page 
1874
    1874
  • Thumbnail: Page 
1875
    1875
  • Thumbnail: Page 
1876
    1876
  • Thumbnail: Page 
1877
    1877
  • Thumbnail: Page 
1878
    1878
  • Thumbnail: Page 
1879
    1879
  • Thumbnail: Page 
1880
    1880
  • Thumbnail: Page 
1881
    1881
  • Thumbnail: Page 
1882
    1882
  • Thumbnail: Page 
1883
    1883
  • Thumbnail: Page 
1884
    1884
  • Thumbnail: Page 
1885
    1885
  • Thumbnail: Page 
1886
    1886
  • Thumbnail: Page 
1887
    1887
  • Thumbnail: Page 
1888
    1888
  • Thumbnail: Page 
1889
    1889
  • Thumbnail: Page 
1890
    1890
  • Thumbnail: Page 
1891
    1891
  • Thumbnail: Page 
1892
    1892