Probability, Expected Utility, and the Ellsberg Paradox

16 Pages Posted: 27 Feb 2011 Last revised: 24 May 2011

See all articles by Thomas Coleman

Thomas Coleman

University of Chicago - Harris School of Public Policy; Close Mountain Advisors LLC

Date Written: February 26, 2011

Abstract

The Ellsberg paradox is often cited as evidence for unknowable "ambiguity" versus computable "risk", and a refutation of the Savage axioms regarding expected utility maximization and the program for revealing "subjective" or "belief-type" probabilities. This note argues that researchers have been too quick to embrace the Ellsberg critique as a refutation of standard expected utility theory. First, Ellsberg performed no actual experiments, and in fact recent empirical evidence on the Ellsberg paradox argues against ambiguity. Second, simple explanations for the paradox deserve as much attention as theories that introduce a new concept such as "ambiguity." One such simple explanation is to consider the Ellsberg thought experiment as part of a "meta-experiment" that includes repeated draws, in which case the choices described by Ellsberg are consistent with expected utility theory.

Keywords: Probability, Expected Utility, Risk, Ambiguity

JEL Classification: D8, D81

Suggested Citation

Coleman, Thomas, Probability, Expected Utility, and the Ellsberg Paradox (February 26, 2011). Available at SSRN: https://ssrn.com/abstract=1770629 or http://dx.doi.org/10.2139/ssrn.1770629

Thomas Coleman (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Close Mountain Advisors LLC ( email )

19 Davenport Ave.
Unit B
Greenwich, CT 06830
United States

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