Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/126518 
Authors: 
Year of Publication: 
2015
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods No. 2015/13
Publisher: 
Max Planck Institute for Research on Collective Goods, Bonn
Abstract: 
Different models of uncertainty aversion imply strikingly different economic behavior. The key to understanding these differences lies in the dichotomy between first-order and second-order ambiguity aversion which I define here. My definition and its characterization are independent of specific representations of decisions under uncertainty. I show that with second-order ambiguity aversion a positive exposure to ambiguity is optimal if and only if there is a subjective belief such that the act´s expected outcome is positive. With first-order ambiguity aversion, zero exposure to ambiguity can be optimal. Examples in finance, insurance and contracting demonstrate the economic relevance of this dichotomy.
Subjects: 
uncertainty aversion
ambiguity
smooth ambiguity aversion
sub-jective beliefs
kinked preferences
JEL: 
D82
D01
D81
G11
Document Type: 
Working Paper

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