Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197192 
Year of Publication: 
2017
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 12 [Issue:] 1 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2017 [Pages:] 377-424
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
Two of the most well known regularities observed in preferences under risk and uncertainty are ambiguity aversion and the Allais paradox. We study the behavior of an agent who can display both tendencies simultaneously. We introduce a novel notion of preference for hedging that applies to both objective lotteries and uncertain acts. We show that this axiom, together with other standard ones, is equivalent to a representation in which the agent (i) evaluates ambiguity using multiple priors, as in the model of Gilboa and Schmeidler (1989), and (ii) evaluates objective lotteries by distorting probabilities, as in the rank dependent utility model, but using the worst from a set of distortions. We show that a preference for hedging is not sufficient to guarantee Ellsberg-like behavior if the agent violates expected utility for objective lotteries; we provide a novel axiom that characterizes this case, linking the distortions for objective and subjective bets.
Subjects: 
Ambiguity aversion
Allais paradox
Ellsberg paradox
hedging
multiple priors
subjective mixture
probability weighting
rank dependent utility
JEL: 
D81
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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