Abstract
We characterize, in the Anscombe-Aumann framework, the preferences for which there are a utility function u on outcomes and an ambiguity index c on the set of probabilities on the states of the world such that, for all acts f and g, f ≳ g ⇔ minp(∫ u(f)dp + c(p) ≥ min p(∫ u(g)dp + c(p)). The function u represents the decision maker's risk attitudes, while the index c captures his ambiguity attitudes. These preferences include the multiple priors preferences of Gilboa and Schmeidler and the multiplier preferences of Hansen and Sargent. This provides a rigorous decision-theoretic foundation for the latter model, which has been widely used in macroeconomics and finance.
Original language | English (US) |
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Pages (from-to) | 1447-1498 |
Number of pages | 52 |
Journal | Econometrica |
Volume | 74 |
Issue number | 6 |
DOIs | |
State | Published - Nov 2006 |
Keywords
- Ambiguity aversion
- Model uncertainty
- Robustness