Journal Article

A Bayesian Approach to Uncertainty Aversion

Yoram Halevy and Vincent Feltkamp

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 72, issue 2, pages 449-466
Published in print April 2005 | ISSN: 0034-6527
Published online April 2005 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2005.00339.x
A Bayesian Approach to Uncertainty Aversion

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The Ellsberg paradox demonstrates that people's beliefs over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of several positively correlated problems, she will be uncertainty averse. We generalize this argument and derive sufficient conditions for uncertainty aversion.

Keywords: D81

Journal Article.  9604 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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