Journal Article

Ambiguity Without a State Space

David S. Ahn

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 1, pages 3-28
Published in print January 2008 | ISSN: 0034-6527
Published online January 2008 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00473.x
Ambiguity Without a State Space

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Many decisions involve both imprecise probabilities and intractable states of the world. Objective expected utility assumes unambiguous probabilities; subjective expected utility assumes a completely specified state space. This paper analyses a third domain of preference: sets of consequential lotteries. Using this domain, we develop a theory of objective ambiguity without explicit reference to any state space. We characterize a representation that integrates a non-linear transformation of first-order expected utility with respect to a second-order measure. The concavity of the transformation and the weighting of the measure capture ambiguity aversion. We propose a definition for comparative ambiguity aversion.

Keywords: D81; D83

Journal Article.  15646 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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