Subjective Ambiguity and Preference for Flexibility

15 Pages Posted: 22 Dec 2010  

Paulo Natenzon

Washington University in St. Louis - Department of Economics; Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 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.

Suggested Citation

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

Paulo Natenzon (Contact Author)

Washington University in St. 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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