American Economic Review Vol. 101 No. 4 2011

Ambiguity Models and the Machina Paradoxes

Aurélien Baillon¹; Olivier l’Haridon²; Lætitia Placido³

¹ Erasmus School of Economics, Erasmus University Rotterdam, PO Box 1738, 3000 DR Rotterdam, The Netherlands. · ² Greg-HEC and IUFM-University Paris Sorbonne, 10 rue Molitor, 75016 Paris, France. · ³ Greg-HEC and CNRS, HEC Paris School of Management, 1 rue de la Liberation, 78501 Jouy-en-Josas, France.

Abstract

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results.

DOI

10.1257/aer.101.4.1547

Volume

101

Issue

4

Pages

1547-1560

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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