Worst- and Best-Case Expected Utility and Ordinal Metautility
19 Pages Posted: 8 May 2019 Last revised: 4 May 2020
Date Written: April 9, 2019
We provide a theory of decision under ambiguity in which the worst-case and best-case expected utility representations are sufficient statistics for a decision maker’s preferences; we refer to the new utility functions as meta-utilities. Our approach, which generalizes many of the commonly used models, provides an ordinal value of these worst- and best-case expected utilities, mirroring the familiar ordinal utility functions over commodity baskets. Ambiguity attitude is simply the marginal rate of substitution in the meta-utility between worst-and best-case expected utilities.
Keywords: ambiguity, pessimism, optimism, expected utility
JEL Classification: D80, D81
Suggested Citation: Suggested Citation