Beyond Uncertainty Aversion

46 Pages Posted: 27 Sep 2019 Last revised: 9 Oct 2019

See all articles by Brian Hill

Brian Hill

HEC Paris - Economics & Decision Sciences; CNRS

Date Written: September 26, 2019

Abstract

Although much of the theoretical literature on ambiguity works under the assumption of uncertainty aversion, experimental evidence suggests that it is not a universal behavioral trait. This paper introduces and axiomatises the family of α-UA (for α-Uncertainty Attitude) preferences: a simple extension of the family of uncertainty averse preferences (Cerreia-Vioglio et al., 2011b) with a Hurwicz-style mixing coefficient, so as to admit a richer range of uncertainty attitudes. The parameters of the model are uniquely identified in our characterisation. This provides, in the Hurwicz α-maxmin EU special case, a new resolution of a long-standing identification problem for this model. Moreover, it yields novel models as special cases, including extensions of variational and multiplier preferences (Maccheroni et al., 2006; Hansen and Sargent, 2001) beyond the assumption of uncertainty aversion. Comparative statics support the interpretation of the mixing coefficient as an index of imprecision aversion. In a standard portfolio problem, the model yields the intuitive relationship between imprecision aversion and investment in an uncertain asset: as the former increases, the latter decreases.

Keywords: ambiguity, uncertainty aversion, imprecision attitude, objective imprecision, multiple priors, alpha-maxmin EU preferences, multiplier preferences

JEL Classification: D01, D80, D81

Suggested Citation

Hill, Brian, Beyond Uncertainty Aversion (September 26, 2019). HEC Paris Research Paper No. ECO/SCD-2019-1349. Available at SSRN: https://ssrn.com/abstract=3460128 or http://dx.doi.org/10.2139/ssrn.3460128

Brian Hill (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

CNRS ( email )

3, rue Michel-Ange
Paris, 75794
France

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