Ambiguity and Ambiguity Aversion

Machina, Mark J.; Siniscalchi, Marciano

doi:10.1016/b978-0-444-53685-3.00013-1

Cited by 162 publications

(92 citation statements)

References 189 publications

(176 reference statements)

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“…In our approach, ambiguity aversion is only one of the conceptual landscapes surrounding the decision-maker's choice in a situation where ambiguity is present (Aerts et al, 2014). This representation is compatible with the experimental findings confirming Ellsberg's prediction about the human attitude toward ambiguity, but also with some recent experiments where such attitude is more controversial (see, e.g., Binmore, Stewart, & Voorhoeve, 2012;Slovic & Tversky, 1974); see also the review (Machina & Siniscalchi, 2014).…”

Section: Introductionsupporting

confidence: 83%

“…People prefer the unambiguous act over its ambiguous counterpart. There is a huge experimental evidence that decision-makers actually show this ambiguity aversion (see, e.g., the extensive review by Machina & Siniscalchi, 2014). Only the experiment by Slovic and Tversky (1974) indicated that 'ambiguity attraction' was at play, while more recent experiments identify other behavioral mechanisms as primary (Binmore et al, 2012).…”

Section: Actmentioning

confidence: 95%

“…This conservative attitude was called 'ambiguity aversion' by Ellsberg, and it violates a specific axiom of SEUT, the 'Sure-Thing principle'-a violation of this principle is also observed in other decisionmaking errors, such as the disjunction effect (Tversky & Shafir, 1992). Ambiguity aversion has been systematically confirmed by several cognitive experiments collected in the last forty years (see, e.g., Camerer & Weber, 1992;Einhorn & Hogarth, 1986;Fox & Tversky, 1995;McCrimmon & Larsson, 1979; see also the exhaustive review by Machina & Siniscalchi, 2014), but the one by Slovic and Tversky (1974), who found an 'ambiguity seeking' attitude. Both ambiguity aversion and ambiguity attraction are however incompatible with the predictions of SEUT, which led many scholars to look for theoretical alternatives that could accommodate the behavior observed in Ellsberg experiments.…”

Section: Introductionmentioning

confidence: 91%

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From ambiguity aversion to a generalized expected utility. Modeling preferences in a quantum probabilistic framework

Aerts

Sozzo

2016

Journal of Mathematical Psychology

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h i g h l i g h t s• We develop a general probabilistic framework to model human decisions under uncertainty.• Our quantum theoretical model faithfully represents different sets of data on Ellsberg and Machina paradoxes. • Our approach captures fundamental aspects of ambiguity, where traditional approaches are problematical. • Our approach opens the way toward a quantum-based state-dependent generalization of expected utility theory. a b s t r a c tAmbiguity and ambiguity aversion have been widely studied in decision theory and economics both at a theoretical and an experimental level. After Ellsberg's seminal studies challenging subjective expected utility theory (SEUT), several (mainly normative) approaches have been put forward to reproduce ambiguity aversion and Ellsberg-type preferences. However, Machina and other authors have pointed out some fundamental difficulties of these generalizations of SEUT to cope with some variants of Ellsberg's thought experiments, which has recently been experimentally confirmed. Starting from our quantum modeling approach to human cognition, we develop here a general probabilistic framework to model human decisions under uncertainty. We show that our quantum theoretical model faithfully represents different sets of data collected on both the Ellsberg and the Machina paradox situations, and is flexible enough to describe different subjective attitudes with respect to ambiguity. Our approach opens the way toward a quantum-based generalization of expected utility theory (QEUT), where subjective probabilities depend on the state of the conceptual entity at play and its interaction with the decision-maker, while preferences between acts are determined by the maximization of this 'state-dependent expected utility'.

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Section: Introductionsupporting

confidence: 83%

Section: Actmentioning

confidence: 95%

Section: Introductionmentioning

confidence: 91%

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From ambiguity aversion to a generalized expected utility. Modeling preferences in a quantum probabilistic framework

Aerts

Sozzo

2016

Journal of Mathematical Psychology

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“…They consider both the Savage setting, with acts mapping to prizes, and the horse-roulette act framework, with acts mapping to objective probability distributions over prizes, and restrict their attention to preferences that admit a Choquet Expected Utility representation on binary acts, but are otherwise arbitrary. For a comprehensive review of the notion of ambiguity aversion, we refer the reader to Machina and Siniscalchi (2014). 9.2 Ambiguity aversion and portfolio choice Keynes (1921) was perhaps the first economist to grasp the full significance of uncertainty for economic analysis and portfolio choice. Whereas conventional models of choice under risk promote diversification, Keynes expressed the view that one should allocate wealth in the few stocks about which one feels most favorably.…”

Section: Schmeidler's Uncertainty Aversionmentioning

confidence: 99%

Diversification preferences in the theory of choice

Giorgi

Mahmoud

2016

Decisions Econ Finan

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Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This corresponds to the notion of risk aversion when one assumes the von-Neumann-Morgenstern expected utility model, but the equivalence fails to hold in other models. This paper analyzes axiomatizations of the concept of diversification and their relationship to the related notions of risk aversion and convex preferences within different choice theoretic models. Implications of these notions on portfolio choice are discussed. We cover model-independent diversification preferences, preferences within models of choice under risk, including expected utility theory and the more general rank-dependent expected utility theory, as well as models of choice under uncertainty axiomatized via Choquet expected utility theory. Remarks on interpretations of diversification preferences within models of behavioral choice are given in the conclusion.

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“…Machina and Siniscalchi 2014). The first is full Bayesian updating with a simple interpretation for multiple prior models: all priors in the relevant set are updated prior-by-prior according to Bayes rule.…”

Section: Introductionmentioning

confidence: 99%

Ambiguity aversion under maximum-likelihood updating

Heyen

2017

Theory Decis

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Maximum-likelihood updating (MLU) is a well-known approach for extending static ambiguity sensitive preferences to dynamic set-ups. This paper develops an example in which MLU induces an ambiguity averse maxmin expected utility (MEU) decision-maker to (1) prefer a bet on an ambiguous over a risky urn and (2) be more willing to bet on the ambiguous urn compared to an (ambiguity neutral) subjective expected utility (SEU) decision-maker. This is challenging, since prior to observing (symmetric) draws from the urns, the MEU decision-maker (in line with the usual notion of ambiguity aversion) actually preferred the risky over the ambiguous bet and was less willing to bet on the ambiguous urn than the SEU decision-maker. The identified switch in betting preferences is not due to a violation of dynamic consistency or consequentialism. Rather, it results from MLU's selection of extreme priors, causing a violation of the stability of set inclusion over the course of the updating process.

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Ambiguity and Ambiguity Aversion

Cited by 162 publications

References 189 publications

From ambiguity aversion to a generalized expected utility. Modeling preferences in a quantum probabilistic framework

From ambiguity aversion to a generalized expected utility. Modeling preferences in a quantum probabilistic framework

Diversification preferences in the theory of choice

Ambiguity aversion under maximum-likelihood updating

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