A Dual Approach to Ambiguity Aversion

CER-ETH – Center of Economic Research at ETH Zurich Working Paper 14/207

42 Pages Posted: 16 Dec 2014 Last revised: 26 Aug 2016

See all articles by Antoine Bommier

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: October 30, 2015

Abstract

In this paper, the assumption of monotonicity of Anscombe and Aumann (1963) is replaced by an assumption of monotonicity with respect to first-order stochastic dominance. I derive a representation result where ambiguous distributions of objective beliefs are first aggregated into “equivalent unambiguous beliefs” and then risk preferences are used to compute the utility of these equivalent unambiguous beliefs. Such an approach makes it possible to disentangle uncertainty aversion, related to the processing of information, from risk aversion, related to the evaluation of the equivalent unambiguous beliefs. Applications to saving behavior and portfolio choice show the tractability of the framework and its intuitive appeal.

Keywords: ambiguity aversion, first-order stochastic dominance, separability, comonotonic sure-thing principle, rank-dependent utility, saving behavior, portfolio choice

JEL Classification: D81

Suggested Citation

Bommier, Antoine, A Dual Approach to Ambiguity Aversion (October 30, 2015). CER-ETH – Center of Economic Research at ETH Zurich Working Paper 14/207, Available at SSRN: https://ssrn.com/abstract=2538555 or http://dx.doi.org/10.2139/ssrn.2538555

Antoine Bommier (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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