Co-Star-Shaped Expected Utility

Abstract

We present an axiomatic foundation for Co-Star-Shaped Expected Utility, a general model that includes several functionals representing preferences under ambiguity. The model is based on a new axiom, Aversion to Certainty Randomization, that relaxes the uncertainty aversion axiom. Intuitively, our new axiom states that a decision maker may prefer to mix an act rather than its certainty equivalent with the null consequence (i.e., the consequence that leaves everything unchanged); the reason is that, although the act and the sure consequence are indifferent, any certainty gets lost when they are mixed with the null consequence. We show that our foundation is intuitive, tractable, and empirically testable.

Keywords: Ambiguity, Weak independence, Uncertainty aversion, Aversion to Certainty Randomization, Star-shaped

JEL Classification: D81