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Subjective Ambiguity and Preference for Flexibility


Paulo Natenzon


Washington University in Saint Louis - Department of Economics; Princeton University - Department of Economics

September 9, 2010

Economic Theory Center Working Paper No. 006-2010

Abstract:     
This paper studies preferences over menus of alternatives. A preference is monotonic when every menu is at least as good as any of its subsets. The main result is that any numerical representation for a monotonic preference can be written in minimax form. A minimax representation suggests a decision maker who faces uncertainty about her own future tastes and who exhibits an extreme form of ambiguity aversion with respect to this subjective uncertainty. Applying the main result in a setting with a finite number of alternatives leads to a natural weakening of the seminal characterization of preference for flexibility introduced by Kreps (1979). This new characterization clarifies the consequences of his last axiom, ordinal submodularity. While the remaining axioms are equivalent to the existence of a (weakly) increasing aggregator of second period maximal utilities, ordinal submodularity holds if and only if this aggregator can be taken to be strictly increasing.

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Date posted: December 22, 2010  

Suggested Citation

Natenzon, Paulo, Subjective Ambiguity and Preference for Flexibility (September 9, 2010). Economic Theory Center Working Paper No. 006-2010. Available at SSRN: http://ssrn.com/abstract=1729302 or http://dx.doi.org/10.2139/ssrn.1729302

Contact Information

Paulo Natenzon (Contact Author)
Washington University in Saint Louis - Department of Economics ( email )
One Brookings Drive
St. Louis, MO 63130
United States
HOME PAGE: http://pnatenzon.wustl.edu
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
HOME PAGE: http://www.princeton.edu/~natenzon
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