On Ambiguity Apportionment
GATE WP 1527
14 Pages Posted: 3 Nov 2015
Date Written: November 2, 2015
Abstract
This paper investigates the notion of changes in ambiguity over loss probabilities in the smooth ambiguity model developed by Klibanoff, Marinacci and Mukerji (2005). Changes in ambiguity over loss probabilities are expressed through the specific concept of stochastic dominance of order n defined by Ekern (1980). We characterize conditions on the function capturing attitudes towards ambiguity under which an individual always considers one situation to be more ambiguous than another in a model of two states of nature. We propose an intuitive interpretation of the properties of this function in terms of preferences for harms disaggregation over probabilities, also labelled ambiguity apportionment.
Keywords: Smooth ambiguity aversion, more ambiguity, ambiguity apportionment, stochastic dominance
JEL Classification: D81, H50
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