scholarly journals Testing Ambiguity Models through the Measurement of Probabilities for Gains and Losses

2015 ◽  
Vol 7 (2) ◽  
pp. 77-100 ◽  
Author(s):  
Aurélien Baillon ◽  
Han Bleichrodt
Keyword(s):  
Expected Utility ◽  
Ambiguity Aversion ◽  
Choquet Expected Utility ◽  
Maxmin Expected Utility ◽  
Stock Indices ◽  
Descriptive Validity ◽  
Utility Models ◽  
Ambiguity Attitudes ◽  
Gains And Losses ◽  
Fourfold Pattern

This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity attitudes: ambiguity aversion for likely gains and unlikely losses and ambiguity seeking for unlikely gains and likely losses. Our data are most consistent with prospect theory and, to a lesser extent, α-maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns. (JEL D81, D83, G11, G12, G14)

Ambiguity Models and the Machina Paradoxes

2011 ◽  
Vol 101 (4) ◽  
pp. 1547-1560 ◽  
Author(s):  
AurÉlien Baillon ◽  
Olivier L'Haridon ◽  
Laetitia Placido
Keyword(s):  
Expected Utility ◽  
Ambiguity Aversion ◽  
Choquet Expected Utility ◽  
Maxmin Expected Utility ◽  
Alternative Representation ◽  
Smooth Model ◽  
Variational Preferences

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results. (JEL D81)

Ambiguity and Probabilistic Information

2020 ◽  
Author(s):  
Adam Dominiak ◽  
Jean-Philippe Lefort
Keyword(s):  
Economic Theory ◽  
Decision Analysis ◽  
Expected Utility ◽  
Choice Behavior ◽  
Ambiguity Aversion ◽  
Thought Experiments ◽  
Choquet Expected Utility ◽  
Canonical Models ◽  
Maxmin Expected Utility ◽  
Probabilistic Information

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. This paper was accepted by Manel Baucells, decision analysis.

If It Is Surely Better, Do It More? Implications for Preferences Under Ambiguity

2021 ◽  
Author(s):  
Soheil Ghili ◽  
Peter Klibanoff
Keyword(s):  
Expected Utility ◽  
Ambiguity Aversion ◽  
Upper Bounds ◽  
Maxmin Expected Utility ◽  
Weak Dominance ◽  
Choice Under Uncertainty ◽  
Tight Connection ◽  
Sales Agent ◽  
Utility Preferences ◽  
Sensitive Behavior

Consider a canonical problem in choice under uncertainty: choosing from a convex feasible set consisting of all (Anscombe–Aumann) mixtures of two acts f and g, [Formula: see text]. We propose a preference condition, monotonicity in optimal mixtures, which says that surely improving the act f (in the sense of weak dominance) makes the optimal weight(s) on f weakly higher. We use a stylized model of a sales agent reacting to incentives to illustrate the tight connection between monotonicity in optimal mixtures and a monotone comparative static of interest in applications. We then explore more generally the relation between this condition and preferences exhibiting ambiguity-sensitive behavior as in the classic Ellsberg paradoxes. We find that monotonicity in optimal mixtures and ambiguity aversion (even only local to an event) are incompatible for a large and popular class of ambiguity-sensitive preferences (the c-linearly biseparable class. This implies, for example, that maxmin expected utility preferences are consistent with monotonicity in optimal mixtures if and only if they are subjective expected utility preferences. This incompatibility is not between monotonicity in optimal mixtures and ambiguity aversion per se. For example, we show that smooth ambiguity preferences can satisfy both properties as long as they are not too ambiguity averse. Our most general result, applying to an extremely broad universe of preferences, shows a sense in which monotonicity in optimal mixtures places upper bounds on the intensity of ambiguity-averse behavior. This paper was accepted by Manel Baucells, decision analysis.

Risk and ambiguous choices: individual versus groups, an experimental analysis

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Divya Aggarwal ◽  
Uday Damodaran ◽  
Pitabas Mohanty ◽  
D. Israel
Keyword(s):  
Design Methodology ◽  
Ambiguity Aversion ◽  
Group Level ◽  
Content Type ◽  
Individual Level ◽  
Real World Applications ◽  
Ambiguity Attitudes ◽  
The Individual ◽  
Normative Models ◽  
Gains And Losses

PurposeThis study examines individual ambiguity attitudes alone and in groups by leveraging the descriptive model of anchoring and adjustment on decision-making under ambiguity. The study extends Ellsberg's probability ambiguity to outcome ambiguity and examines decisions made under both ambiguities, at different likelihood levels and under the domain of gains and losses.Design/methodology/approachThe methodology selected for this study is a two-stage within-subject lab experiment, with participants from different Indian universities. Each participant made 12 lottery decisions at the individual level and at individuals in the group level.FindingsThe results show that ambiguity attitudes are not universal in nature. Ambiguity seeking as a dominant choice was observed at both the individual level and at individual in the group level. However, the magnitude of ambiguity seeking or ambiguity aversion contingent upon the domain of gains and losses differed widely across the individual level and at individuals in the group level.Research limitations/implicationsThe study enables to contribute toward giving a robust descriptive explanation for individual behavior in real-world applications of finance. It aims to provide direction for theoretical normative models to accommodate heterogeneity of ambiguity attitudes.Originality/valueThe study is novel as it examines a two-dimensional approach by representing ambiguity in probability and in outcomes. It also analyzes whether decisions under ambiguity vary when individuals make decisions alone and when they make it in groups.

scholarly journals On the falsifiability and learnability of decision theories

2020 ◽  
Vol 15 (4) ◽  
pp. 1279-1305
Author(s):  
Pathikrit Basu ◽  
Federico Echenique
Keyword(s):  
Expected Utility ◽  
Statistical Estimation ◽  
Small Data ◽  
Data Sets ◽  
Learning Approaches ◽  
Vc Dimension ◽  
Choquet Expected Utility ◽  
Utility Models ◽  
Small Data Sets ◽  
Expected Utility Model

We study the degree of falsifiability of theories of choice. A theory is easy to falsify if relatively small data sets are enough to guarantee that the theory can be falsified: the Vapnik–Chervonenkis (VC) dimension of a theory is the largest sample size for which the theory is “never falsifiable.” VC dimension is motivated strategically. We consider a model with a strategic proponent of a theory and a skeptical consumer, or user, of theories. The former presents experimental evidence in favor of the theory; the latter may doubt whether the experiment could ever have falsified the theory. We focus on decision‐making under uncertainty, considering the central models of expected utility, Choquet expected utility, and max–min expected utility models. We show that expected utility has VC dimension that grows linearly with the number of states, while that of Choquet expected utility grows exponentially. The max–min expected utility model has infinite VC dimension when there are at least three states of the world. In consequence, expected utility is easily falsified, while the more flexible Choquet and max–min expected utility are hard to falsify. Finally, as VC dimension and statistical estimation are related, we study the implications of our results for machine learning approaches to preference recovery.

Choquet expected utility with affine capacities

2015 ◽  
Vol 81 (2) ◽  
pp. 177-187
Author(s):  
Pascal Toquebeuf
Keyword(s):  
Expected Utility ◽  
Choquet Expected Utility

Full Implementation under Ambiguity

2021 ◽  
Vol 13 (1) ◽  
pp. 148-178
Author(s):  
Huiyi Guo ◽  
Nicholas C. Yannelis
Keyword(s):  
Social Choice ◽  
Expected Utility ◽  
Sufficient Conditions ◽  
Choice Functions ◽  
Maxmin Expected Utility ◽  
Special Cases ◽  
Social Choice Functions ◽  
Bayesian Implementation ◽  
Pareto Efficient ◽  
Choice Set

This paper introduces the maxmin expected utility framework into the problem of fully implementing a social choice set as ambiguous equilibria. Our model incorporates the Bayesian framework and the Wald-type maxmin preferences as special cases and provides insights beyond the Bayesian implementation literature. We establish necessary and almost sufficient conditions for a social choice set to be fully implementable. Under the Wald-type maxmin preferences, we provide easy-to-check sufficient conditions for implementation. As applications, we implement the set of ambiguous Pareto-efficient and individually rational social choice functions, the maxmin core, the maxmin weak core, and the maxmin value. (JEL D71, D81, D82)

scholarly journals Maxmin expected utility with non-unique prior

2010 ◽  
pp. 125-135 ◽  
Author(s):  
Itzhak Gilboa ◽  
David Schmeidler
Keyword(s):  
Expected Utility ◽  
Maxmin Expected Utility
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