THE AMBIGUITY AVERSION LITERATURE: A CRITICAL ASSESSMENT

We provide a critical assessment of the ambiguity aversion literature, which we characterize in terms of the view that Ellsberg choices are rational responses to ambiguity, to be explained by relaxing Savage's Sure-Thing principle and adding an ambiguity-aversion postulate. First, admitting Ell...

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Bibliographic Details
Published in:Economics and philosophy 2009-11, Vol.25 (3), p.249-284
Main Authors: Al-Najjar, Nabil I., Weinstein, Jonathan
Format: Article
Language:English
Subjects:
Ambiguity
Beliefs
Decision making
Economic behaviour
Economic models
Economic theory
Economics
Expected utility
Game theory
Macroeconomics
Microeconomics
Public choice
Risk theory
Studies
Taste
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Summary:We provide a critical assessment of the ambiguity aversion literature, which we characterize in terms of the view that Ellsberg choices are rational responses to ambiguity, to be explained by relaxing Savage's Sure-Thing principle and adding an ambiguity-aversion postulate. First, admitting Ellsberg choices as rational leads to behaviour, such as sensitivity to irrelevant sunk cost, or aversion to information, which most economists would consider absurd or irrational. Second, we argue that the mathematical objects referred to as “beliefs” in the ambiguity aversion literature have little to do with how an economist or game theorist understands and uses the concept. This is because of the lack of a useful notion of updating. Third, the anomaly of the Ellsberg choices can be explained simply and without tampering with the foundations of choice theory. These choices can arise when decision makers form heuristics that serve them well in real-life situations where odds are manipulable, and misapply them to experimental settings.
ISSN:0266-2671
1474-0028
DOI:10.1017/S026626710999023X