Ambiguity Under Growing Awareness

40 Pages Posted: 3 Oct 2018

Date Written: September 10, 2018

Abstract

In this paper, we study choice under growing awareness in the wake of new discoveries. The decision maker's behavior is described by two preference relations, one before and one after new discoveries are made. The original preference admits a subjective expected utility representation. As awareness grows, the original decision problem expands and so does the state space. Therefore, the decision maker's original preference has to be extended to a larger domain, and consequently the new preference might exhibit ambiguity aversion. We propose two consistency notions that connect the initial and new preferences. Unambiguity Consistency requires that the original states remain unambiguous while new states might be ambiguous. This provides a novel interpretation of ambiguity aversion as a systematic preference to bet on old states than on newly discovered states. Likelihood Consistency requires that the relative likelihoods of the original states are preserved. Our main results axiomatically characterize a maxmin expected utility representation of the new preference that satisfies the two consistency notions. Moreover, we introduce a comparative notion of ambiguity aversion under growing awareness and characterize a parametric version of our model.

Keywords: Unawareness; Ambiguity; Subjective Expected Utility; Maxmin Expected Utility; Unambiguity Consistency; Likelihood Consistency; Generalized Reverse Bayesianism

JEL Classification: D01; D81

Suggested Citation

Dominiak, Adam and Tserenjigmid, Gerelt, Ambiguity Under Growing Awareness (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=3247761 or http://dx.doi.org/10.2139/ssrn.3247761

Adam Dominiak

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

Gerelt Tserenjigmid (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

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