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Calibrated uncertainty

Author

Listed:
  • Gul, Faruk
  • Pesendorfer, Wolfgang
Abstract
We define a binary relation (qualitative uncertainty assessment) that describes the shared likelihood assessments of decision makers with diverse ambiguity attitudes. Ambiguity renders this binary relation incomplete. Our axioms yield a representation according to which A is more likely than B if and only if a capacity, called uncertainty measure, assigns a higher value to A than to B and a higher value to B-complement than to A-complement. Agents combine this uncertainty perception with their uncertainty attitude to form a complete ranking of bets. We provide a representation theorem for this extended model, show that its parameters are uniquely identified and characterize a new measure of comparative ambiguity aversion. For general acts, we modify Machina and Schmeidler's (1992) sophistication axiom to allow for ambiguity and analyze three nested extensions: first, we axiomatize a minimal extension which reduces to expected utility when there is no ambiguity; the second and third extensions show how non-expected utility theories can be accommodated in our framework.

Suggested Citation

  • Gul, Faruk & Pesendorfer, Wolfgang, 2020. "Calibrated uncertainty," Journal of Economic Theory, Elsevier, vol. 188(C).
    • Handle: RePEc:eee:jetheo:v:188:y:2020:i:c:s0022053120300211
    DOI: 10.1016/j.jet.2020.105016
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    References listed on IDEAS

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    Cited by:

    1. Baillon, Aurélien & Bleichrodt, Han & Li, Chen & Wakker, Peter P., 2021. "Belief hedges: Measuring ambiguity for all events and all models," Journal of Economic Theory, Elsevier, vol. 198(C).

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    More about this item

    Keywords

    Ambiguity; Separation of ambiguity perception and ambiguity attitude; Ambiguity measure;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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