Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion

55 Pages Posted: 11 Jun 2011

See all articles by Simon Grant

Simon Grant

Rice University - Department of Economics; Australian National University

Ben Polak

Yale University - Department of Economics

Date Written: June 9, 2011

Abstract

We axiomatize, in an Anscombe-Aumann framework, the class of preferences that admit a representation of the form V(f) = mu - rho(d), where mu is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and rho(d) is a measure of (aversion to) dispersion that corresponds to an uncertainty premium. The key feature of these mean-dispersion preferences is that they exhibit constant absolute uncertainty aversion. This class includes many well-known models of preferences from the literature on ambiguity. We show what properties of the dispersion function rho(dot) correspond to known models, to probabilistic sophistication, and to some new notions of uncertainty aversion.

Keywords: ambiguity aversion, translation invariance, dispersion, uncertainty, probabilistic sophistication

JEL Classification: D81

Suggested Citation

Grant, Simon Harold and Polak, Benjamin, Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion (June 9, 2011). Cowles Foundation Discussion Paper No. 1805, Available at SSRN: https://ssrn.com/abstract=1861353 or http://dx.doi.org/10.2139/ssrn.1861353

Simon Harold Grant

Rice University - Department of Economics ( email )

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Australian National University ( email )

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Benjamin Polak (Contact Author)

Yale University - Department of Economics ( email )

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