Two Ellsberg-style thought experiments are described that reflect on the smooth ambiguity decision model developed by Klibanoff, Marinacci, and Mukerji (2005). The first experiment poses difficulties for the model's axiomatic foundations and, as a result, also for its interpretation, particularly for the claim that the model achieves a separation between ambiguity and the attitude toward ambiguity. Given the problematic nature of its foundations, the behavioral content of the model and how it differs from multiple priors, for example, are not clear. The second thought experiment casts some light on these questions.
This paper describes a continuous time model of an economy with finitely many infinitely-lived consumers and a finite number of capital goods. Two objectives are achieved. First, recursive (nonadditive) utility functionals are formulated and analyzed. Second, these preference functionals are applied to analyze the nature of efficient allocations in a dynamic economy. Two classes of global turnpike propositions are proven which provide the basis for a model of the long-run distribution of wealth. These propositions also provide new perspective regarding existing stability literature based on additive utilities.
On formule un ensemble de postulats d'aversion pour le risque absolu decroissant et on montre que seules les fonctionnelles d'utilite moyenne-variance peuvent les satisfaire
[The theory of duality has been an extremely useful tool in the analysis of the standard models of consumer and producer behavior. This paper describes an extension of the theory to a wider class of problems of static optimization. The generalized duality theory is then applied to the integrability question in fairly general optimization models. A major gap in the comparative statics of optimization models is partially closed.]
The comparative static effects of increased uncertainty in standard two-period models of consumer and producer behavior under uncertainty have been shown in [10 and 11] to be complex. Two principal objectives of this paper are: (i) to describe some assumptions, forms of risk independence, about preferences and technologies, that simplify the behavioral effects of increased variability; and (ii) to characterize the preferences and technologies that are consistent with risk independence. The theory of duality plays an important part in the analysis.
[In conformity with the Savage model of decision-making, modern asset pricing theory assumes that agents' beliefs about the likelihoods of future states of the world may be represented by a probability measure. As a result, no meaningful distinction is allowed between risk, where probabilities are available to guide choice, and uncertainty, where information is too imprecise to be summarized adequately by probabilities. In contrast, Knight and Keynes emphasized the distinction between risk and uncertainty and argued that uncertainty is more common in economic decision-making. Moreover, the Savage model is contradicted by evidence, such as the Ellsberg Paradox, that people prefer to act on known rather than unknown or vague probabilities. This paper provides a formal model of asset price determination in which Knightian uncertainty plays a role. Specifically, we extend the Lucas (1978) general equilibrium pure exchange economy by suitably generalizing the representation of beliefs along the lines suggested by Gilboa and Schmeidler. Two principal results are the proof of existence of equilibrium and the characterization of equilibrium prices by an "Euler inequality." A noteworthy feature of the model is that uncertainty may lead to equilibria that are indeterminate, that is, there may exist a continuum of equilibria for given fundamentals. That leaves the determination of a particular equilibrium price process to "animal spirits" and sizable volatility may result. Finally, it is argued that empirical investigation of our model is potentially fruitful.]
Larry G. Epstein, Stanley E. Zin, Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework, Econometrica, Vol. 57, No. 4 (Jul., 1989), pp. 937-969
Larry G. Epstein, Michael G. S. Denny, The Multivariate Flexible Accelerator Model: Its Empirical Restrictions and an Application to U.S. Manufacturing, Econometrica, Vol. 51, No. 3 (May, 1983), pp. 647-674
Evidence such as the Ellsberg Paradox shows that decision-makers do not assign probabilities to all events. It is intuitive that they may differ not only in the probabilities assigned to given events but also in the identity of the events to which they assign probabilities. This paper describes a theory of probability that is fully subjective in the sense that both the domain and the values of the probability measure are derived from preference. The key is a formal definition of `subjectively unambiguous event.'
This paper constructs a space of states of the world representing the exhaustive uncertainty facing each player in a strategic situation. The innovation is that preferences are restricted primarily by 'regularity' conditions and need not conform with subjective expected utility theory. The construction employs a hierarchy of preferences, rather than of beliefs as in the standard Bayesian model. Applications include the provision of foundations for a Harsanyi-style game of incomplete information and a rich framework for the axiomatization of solution concepts for complete information normal form games.