1. Relative concave utility for risk and ambiguity
- Author
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Baillon, Aurélien, Driesen, Bram, and Wakker, Peter P.
- Subjects
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UTILITY functions , *RISK aversion , *INFORMATION theory , *COMPARATIVE studies , *EMPIRICAL research , *MATHEMATICAL models , *PROBABILITY theory , *AMBIGUITY - Abstract
Abstract: This paper presents a general technique for comparing the concavity of different utility functions when probabilities need not be known. It generalizes: (a) Yaariʼs comparisons of risk aversion by not requiring identical beliefs; (b) Kreps and Porteusʼ information-timing preference by not requiring known probabilities; (c) Klibanoff, Marinacci, and Mukerjiʼs smooth ambiguity aversion by not using subjective probabilities (which are not directly observable) and by not committing to (violations of) dynamic decision principles; (d) comparative smooth ambiguity aversion by not requiring identical second-order subjective probabilities. Our technique completely isolates the empirical meaning of utility. It thus sheds new light on the descriptive appropriateness of utility to model risk and ambiguity attitudes. [Copyright &y& Elsevier]
- Published
- 2012
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