Preferences with changing ambiguity aversion

• Main Author: Jingyi XUE
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: Ambiguity; Uncertainty averse preferences; Weighted maxmin representation; Variant constraint representation; Decreasing absolute uncertainty aversion; Increasing relativeUncertainty aversion; Wealth effect; Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/1904; https://ink.library.smu.edu.sg/context/soe_research/article/2903/viewcontent/preferences_with_changing_ambiguity_aversion__revised_.pdf
• Institution: Singapore Management University

This paper provides two equivalent representations for thegeneral class of uncertainty averse preferences studied by Cerreia-Vioglio,Maccheroni, Marinacci and Montrucchio (2011). The two representations employrespectively two important extensions of Gilboa and Schmeidler (1989)’s maxmindecision rule. The first is a weighted maxmin representation with anon-constant weight used in mixing the minimum and maximum expected utilities.The second is a variant constraint representation which evaluates a prospect bythe worst expected utility over a neighborhood of approximating priors wherethe size of the neighborhood depends on the prospect. The equivalent representationshave advantage in several respects. In the second part of this paper, we studythe wealth effect under ambiguity. We propose axioms on absolute and relativeuncertainty aversion and derive the three representations for the uncertaintyaverse preferences displaying decreasing (increasing) absolute uncertaintyaversion. The characterization result not only provides a model of relevantbehavior under ambiguity, but also shows how the two alternativerepresentations stand out in presenting the changing patterns of one’suncertainty aversion.